Document of The World Bank FOR OFFICIAL USE ONLY LA. 2Z3Z6-YC) Report No- P-3606-YU REPORT AND RECOMIMENDAIION OF THE PRESIDENT OF THE INTERNAIIONAL BANK FOR RECONSTRUCTION AND DiEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USS275 MILLION TO THE UDRUZENA BEOGRADSKA BANKA WITH THE GUARANTEE OF THE SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA FOR A STRUCTURAL ADJUSTMENT LOAN June 2, 1983 This documnent has a restricted distribution and may be used by recipients only in the performanee of their official duties. Its contents may not otherwise be disclosed without World Bank autborization. CURRENCY EQUIVALENTS* Currency Unit - Dinar (Din) Currency Unit 1/ Calendar 1982 2/ April 22, 1983 US$1 Dinar 51.32 Dinar 79.66 Dinar 1 US$0.019 USą0.014 Dinar 1,000,000 US$19,485.58 US$13,650.01 FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS APR Annual Plan Resolt-cion LUAL Basic Organization of Associated Labor CGE Computable General Equilibrium CIFER Community of Interest for Foreign Economic Relations LUl Community of Interest EDF Export bevelopment Fund GI%kS Goods and Nonfactor Services LDR Less Developed Regions LPG Liquified Petroleum Gas hbk More Developed Regions Nbb National Bank of Yugoslavia hKO. Railway Iransport Organization SAL Structural Adjustment Loan SAP Socialist Autonomous Province SIJK Social Accounting Service UBB bdruzena Beogradska Banka IbA Yugoslav banks' Association YLlLC Yugoslav Bank for International Economic Cooperation toe tons of oil equivalent 1/ The dinar has not been maintained within announced margins since July 12, 1973. lts parity is reviewed frequently to ensure maintenance of external competitiveness. 2i Period Average. FOR OMCIAL UTSE ONLY Socialist Federal Republic of Yugoslavia Structural Adjustment Loan Table of Contents Page No. Loan Summary . ............ ........ .... ... .... . . .4........ .i Part I - The EcoM.... ... ................... 1 A. Institutional Setting .........1 B. Economic Trends and Development Issues. . 2 C. Recent Economic Developments .. ........ .. .... 3 Part II - The Structural Adjustment Program............ 6 A. Introductio ... ..6 B. Investment Planning and Resource Allocation ... 8 lntroductiou 8.............. . 8 Ongoing Investmentsvt. .mn...... . .. . .. 9 bew Investments ................. .. . ... ....... ... 10 Interest Rate Policy ................. ......................... 12 Financial Planning ............. ................................ 13 C. Foreign Exchange Allocation and External Trade Policies ......... 14 Foreign Exchange Allocation . ................. 14 External Debt Monitoring ........................................ 15 Export Promotion ................ ................ 16 Trade Incentives . ..... ................................ 17 D. Price Policies and Enterprise Decision-making . . 18 The Regulatory Framework .... ................................ 18 Sectoral ?ricing Issues .. 19 Enterprise Decision-making ........................ 22 Sectoral Issues ................................................. 23 Energy ...... 23 Agriculture ................................................... 25 E. Expected Effects of the Structural Adjustment Program . . 26 Part Ill - The Structural Adjustment loan ... . 35 A. Loan History ................... .... ................ 35 B. IMF Activities in Yugoslavia and Relationship to the Proposed Loan ........... .............. 36 C. Benefits and Risks ... . ............... ...... 39 D. Loan Amount .... ............... ... . . 40 E. The Borrower . .. .......... . ...... 40 F. 14onitoring ................................... 41 G. Export Development Fund, Loan Administration . . .............. ..... 42 X. Categories of Goods to be Financed . . 43 1. Counterpart Funds . . ................... .43 J. Procurement and Disbursement ................ . . 44 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contcnts may not otherwise be disclosed without Woild Bank authorization. Iable of Contents (continued) Page No. Part IV - Other Bank Group Operations in Yugoslavia and Relationship to Proposed Loan ...................... 44 Part V - Legal Instruments and Authority . . 46 Part VI - Recommendations .............. .............. ............. 46 Socialist Federal Republic of Yugoslavia Structural Adjustment Loan Loan Summary Borrower: Udruzena Beogradska Banka (UBB) Guarantor: Socialist Federal Republic of Yugoslavia. Amount: $275 million including capitalized front end fee. Beneficiaries; All industrial enterprises of Yugoslavia ("work organizations of associated labor"), including agro-indusrries, that can just-fy their ability to export to convertible currency areas based on evidence of export orders or contracts and have import requirements in convertible currency for production. Terms: 15 years, including three years' grace, at the standard variable interest rates. On-lending Terms: UBB would on-lend the loan proceeds through an Export Development Fund (EDF) to be established within UBB. Sub-loan maturities will normally reflect the productior. cycle and the period for receiving actual export revenues. They will not exceed 6 months for exports of consumer goods and intermediate products, 12 months for exports of capital goods, and 18 months for exports rcfinanced by the Yugoslav Bank for International Economic Cooperation (YBIEC). Sub-loans will carry interest at the 6 months dollar LIBOR in effect on the day of the sub-loan commitment plus a spread of 2% for the EDF, both to be paid in US dollars, plus a spread of 1% for the intermediaries (to be allocated between UBB, the authorized bank of the sub-borrower and YBIEC, as the case may be) and an annual guarantee commission of about 0.42 of the sub-lean amount, both to be paid in Dinars. In case the sub-loan interest rate would be lower than the applicable Bank rate on the day of sub-loan commitment, the spread to the EDF shall be increased to equalize the sub-loan interest rate with the applicable Bank rate. - ii - Loan Description; The proposed loan is designed to support the implementation of the Government's comprehen- sive struictural adjustment program which has been outlined in a Letter of Development Policy submitted to the Bank. The principal aim of the program is to place the country's balance of paymeat3 with the convertible currency area on a sounder rooting, and to improve the efficiency of investment selection and resource allocation in the economy. To achieve these objectives, specific actions are to be taken in the areas of investment planning and resource allocation, interest rate policy, foreign exchange allocation, export promotion, export incentives, the regulatory framework for price control, price adjustments in the energy and transportation sectors, and the financial accountability of enterprises. The foreign exchange provided by the loan would be used to finance through sub-loans to eligible exporters by the EDF essential imports of raw materials, intermediate goods, spare parts and imported components for turn-key industrial projects, civil works, ships and capital goods exports. The main risks arise from uncertainties in the external environment which could affect export prospects and borrowing costs. Estimated Disbursements: The loan will be disbursed in two tranches of *175 million and $100 million respectively: the first tranche is expected to be disbursed by end 1983. The second tranche would begin disbursing subiect to the Bank being satisfied, after an exchange of views with the government to take place about October 1983, with the progress made in the execution of the Government's adjustment program. The entire loan is expected to be disbursed by June 30, 1984. btaff Appraisal Report: None. Economic Rate of Return; Not applicable. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORI A!ND RECOMMENDATION OF THE PRESIDENT OF THE IBRD 10 THE EXECUTIVE DIRLC1ORS ON A PROPOSED LOAN TO UDRUZENA BEOGRADSKA BA.NKA (UBB) WIlh ThE GUARANTEE OF THE SOCIALISI FEDERAL REPUBLIC OF YUGOSLAVIA FOR A STRUCTURAL ADJUSTMENT LOAN 1. I submit the following report and recommendation on a proposed loan to the Udruzena Beogradska Banka (UBB) for the equivalent of US$275 million, with the guarantee of the Socialist Federal Republic of Yugoslavia, to help support the Government's structural adjustment program. The loan would have ' term of 15 years, including three years of grace, with interest at the standard variable interest -ate. PART I - TIH. ECONOMY 2. An economic mission visited Yugoslavia in June 1981 and its report Yugoslavia: Adjustment Policies and Development Perspectives (3954-YU) was distributed to the Executive Directors on November 2, 1982. Basic data on the economy are given in Annex I. A. Institutional Setting 3. The social sector in Yugoslavia, which includes government, enterprises and public institutions, plays the leading role in economic and social development. It accounts for 85X of GDP and employs over half the total labor force. The private sector consists predominantly of small tarms and enterprises, mainly engaged in handicrafts, construction. trade, transport and tourism. Decision making at all levels is governed by the principle ot workers' self-management, involving a unique set of institutions and instruments of economic policy. The current system has evolved over the years with major changes introduced through the Constitution of 1974. Responsibility for important social and economic decisions has increasingly shifted from the federal level to the republics, autonomous provinces and communes. Concurrently, the control of workers' collectives over the socially-owned means of production has been increased by a restructuring of all economic organizations into legally autonomous Basic Organizations of Associated Labor (BOALs) which are the smallest production units producing a marketable output. 4. In addition to this strengthening of workers' participation at the microeconomic level, the concept of workers' management has been extended to encompass macroeconomic decisions. A set of instruments called social compacts and self-management agreements which are widely used in micro economic decisions have also gradually become a part of the system of macroeconomic management. These instruments enable the participation of all economic agents in the formulation of macroeconomic policy while maintaining decentralized responsibility for policy implementation. Beginning with the last medium-term plan (1976-80) these instruments have been used to supplement more conventional monetary and fiscal policy measures, particularly in the areas of prices, incomes, and employment. -2- 5. The 1974 Constitution also introduced a new framework for economic and social planning, designed to reconcile decentralized decision-making with consistent and coordinated action. The system of planning first seeks to eetab'ish, through a set of social compacts, a national consensus on the major medium-term goals for the economy. Thereafter, plan formulation is based on participation of all economic and social units, including government bodies, on a non-hierarchical basis. An exhaustive interchange of intormation is required to achieve consistency among the plans of economic units concurrent with broader social objectives. Once consistency is achieved, economic units enter into legally binding medium-term agreements on supply, demand and investment intentions. In case agreements cannot be reached by the prescribed date, state bodies at the relevant level are permitted to intervene, but only on a temporary basis. B. Economic Trends and Development Issues 6. The economic development of Yugoslavia over the past two decades has been impressive, characterized by rapid economic growth and structural transformation. Between 1960 and 1981, GDP grew at an average annual rate of about 6% in real terms. The share of investment in GDP has been high throughout the period, above 302 in recent years. As population growth has been only 1% per annum, real per capita income has more than doubled during the period. Per capita GNP in 1981 is estimated to be US$2,790 at 1981 market prices. 1/ The social sector, in particular industry, has been the driving force of the economy, with the share of industry in GDP now around 42X and that of agriculture about 12%. The past three decades bave also witnessea the growing integration of Yugoslavia into the world economy. Between 1960 ani 1981 merchandise exports and imports grew by around 6X and 8% per annum in real terms, respectively. However, Yugoslavia's export performance to the industrial market economies has showed increasing weakness over the past decade, particularly since 1973. 7. While overall growth performance has been impressive, large regional disparities persist. The Republics of Bosnia-Herzegovina, Macedonia and Montenegro, each with two-thirds of the national average per capita output, and the Autonomous Province of Kosovo, with one-third, are officially designated as less developed regions (LDR). The difference in per capita output between the most developed region in the country, Slovenia, and the least developed, Kosovo, is 6 to 1. In addition to these interregional disparities there are large intraregional disparities with differences in per capita output between communes as high as 10 to 1. These disparities reflect several factors, notably the greater incidence of low productivity agriculture in the LDR, their higher dependency ratios and their higher population growth rates, which averaged 1.22 annually during 1971-81. Since 1965 sizeable concessionary investment credits (with about a 50% grant element), have been transferred to the LDR through the Federal Fund for the Accelerated Development of the Less Developed Regions, 1/ According to 'World Bank Atlas methodology. -3- financed through a tax on all social sector enterprises in the economy. In addition, the Federal budget provides supplementary resources for social sector expenditures in the LDR. Together, these resources account for about 10% of the social product of the LDR. 8. Linked to the issue of regional disparities has been the problem of providing adequate e-ployment opportunities in the modern sector. Since 1954, employment in the modern social sector has increased by around 4X per annum, facilitating rapid outflows from the agricultural sector. Despite this impressive record, substantial productivity and income differentials remain between the modern (mainly social) and the traditional (predominantly private) agricultural sectors. The persistence of these aitferentials has resulted in high demand for modern sector employment on the part of the rural labor force. Large numbers of Yugoslavs have sought temporary employment abroad since the late 1960s. At its peak in 1973 there were about 1.1 million external migrants. However, since 1973, this trend has been reversed, and returning migrants have added to the pressure on the social sector to create new work places. Unemployment rates have risen rapidly from about 72 in 1971 to over 122 in 1982. 1/ The incidence of unemployment is highly regionalized; in 1982 unemployment rates ranged trom 29% in Kosovo to 2% in Slovenia. C. Recent Economic Developments 9. Despite an impressive record of economic and social development since World War II, Yugoslavia today faces perhaps its most difficult economic situation since the upheavals which accompanied economic liberalization in 1965. The domestic and international repercussions of the events which followed the 1979 oil price shock are still being felt by the Yugoslav economy. In many respects the difficulties facing Yugoslavia are similar to those facing most middle income developing countries: higher oil prices and interest rates, sluggish world trade and more difficult access t. international commercial bank credit. However, the severity of Yugoslavia's economic problems also reflects structural deficiencies in the pattern of Yugoslav development which became increasingly apparent in the seventies and which are discussed in Part II ot this report. These conditions prompted the Government to introduce a series of stabilization measures beginning in 1980. The main elements of the stabilization program introduced thus far have been restrictive monetary and fiscal policies to curb investment and reduce inflationary pressure, and the more active use of exchange rate policies to encourage exports. At the same time, imports have been scaled back in line with the revenues accruing from export earnings and more limited foreign borrowing. 1/ These rates are not directly comparable to those in other countries. They represent the ratio of registered job-seekers (including some currently employed) to the social sector labor force. The ratio of registered job seekers to the total resident labor force was about 9% in 1982. -4- Yugoslavia's stabilization efforts have been supported by substantial IMF assistance, and the country is currently in the third year of a three-year standby arrangement with the IMF in an aggregate amount of SDR 1,662 million, in effect since January 1981. IMF activities in Yugoslavia are aiscussed in greater detail in Part III of this report. 10. As a result of its stabilization program, 'iugoslavia succeeded in reducing its current account deficit from $3.7 billion in 1979 to $2.3 billion in 1980 and to $0.9 billion in 1981. Underlying this improvement was a strong surge in merchandise exports which increased in volume by 11% in 1980 and 11.72 in 1981. At the same time, merchandise import volumes were reduce1 by 10.5Z in 1980 and 4.92 in 1981. However, in 1982 export volume declined by 6.2%. This was attributable to continued recession in Yugoslavia's major trading partners, some erosion of competitiveness, and to some extent to shortages of imported inputs. Performance of invisibles in 1982 was also below expectations. The Yugoslav authorities responded by devaluing the dinar (by 492 against the dollar during 1982) and by further cuts in imports (the volume of merchandise imports in 1982 declined by 10%). As e result of these efforts the current account deficit was further reduced, to an estimated $0.5 billion. One notable effect of the cutback in imports has been the shortage of oil product". In October 1982, the government introduced rationing of gasoline for domestic passenger vehicles with purchases restricted to 40 liters per month. 'While every effort is being made to isolate important domestic producers (and exporters in particular) from the effects of the import restrictions, the import squeeze is continuing to cause difficulties for Yugoslav enterprises. 11. Yugoslavia's economic growth has slowed markedly since 1979, when GDiP grew by 4.2%. In both 1980 and 1981 GDP growth is estimated at 2.2%. The latest available estimates indicate that GDP declined by 1% in 1982. This reduction in growth is partly a result of the stabilization measures, but is also due to shortages of imported mnputs. Miining and manufacturing output has been particularly affected. In 1979 it increased by over 8.22, but over the two years 1980 and 1981 it rose by only 4.12, and declined by an estimated 0.32 in 1982. There have been marked fluctuations in agricultural output mainly due to climatic fattors. After stagnating in 1980 and 1981, agricultural output increased by 52 in 1982. 12. Fixed investment has fallen markedly in the past three years. Whereas fixed investment increased at an average rate of 9.5% between 1975 and 1979, it declined by 6.02 per year in 1979-82. Despite these slowdowns in investment and economic growth, Yugoslavia has been remarkably successful in maintaining a fast pace of job creation in the social sector. Social sector employment increased by 3.2% in 1980, 2.9% in 1981 and 2.32 in 1982. Generally speaking, employment growth has been fastest in the LDR where the incidence of unemployment is more severe. 13. One of the major aims of the stabilization program has been to secure a significant reduction in the rate of inflation, which increased -5- from 13% in 1978 to 22% in 1979. Despite significant declines in investment and real domestic demand, inflationary pressures have continued to pose substantial probleus for the economy. In 1980 and 1981 inflation accelerated to 30% and 38% respectively. In an effort to bring inflation under control, the authorities introduced temporary price ceilings on a wide range of goods on July 31, 1982. This policy has met with only limited success, however, and inflation during 1982 was 322. The persistence of inflation has been due to a combination of factors. The efforts of the authorities to restructure the pattern of relative prices to promote more efficient resource allocation, stimulate agricultural production and rationalize energy use have all served to put upward pressure on the price level. The increase in international prices since 1979 and the cumulative effects of the substantial depreciation of the dinar have resulted in a considerable increase in domestic production costs. Nominal personal income growth has also proved difficult to control. The Government's intention is to reduce the rate of inflation to 20% during 1983. Given the likely inflationary effects of the depreciation of the dinar and mounting pressure from workers to reverse the decline in real wages (which have fallen by 17Z in real terms since 1979), any reduction in the inflation rate below the 1982 level should be considered a significant achievement. 14. Yugoslavia's adjustment efforts have been complicated by adverse developments in the international capital markets. Increases in international interest rates since 1979 helped push interest payments from $0.8 billion in 1979 to $2.0 billion in 1982. Principal repayments on medium- and long-term debt were an estimated $1.9 billion in 1982. While there is recognition of the magnitude of Yugoslavia's adjustment efforts, the commercial banks have tended to adopt a cautious position toward increasing their exposure. This has partly been due to adverse developments in other parts of the world and partly to liquidity problems experienced by some Yugoslav banks. During 1982, medium- and long-term credits to Yugoslavia declined to approximately $2.0 billion, compared with $4.2 billion during 1980. Short-term capital outflows put further pressure on the balance of payments. While Yugoslavia was able to increase its short-term borrowing by about $1 billion during the 1979-81 period, it was unable to roll all of this debt over during 1982 and outstanding short-term debt declined by approximately $500 million over the course of the year. 15. The above developments caused mounting external liquidity difficulties for the economy in the second half of 1982, so that at the beginning of 1983 foreign exchange reserves (including foreign assets of the commercial banks) stood at $1.7 billion, a month's imports from the convertible area. To help ease Yugoslavia's foreign exchange liquidity difficulties, at the invitation of the IMF se-eral meetings have taken place in the first half of the year with Yugoslavia's major creditor banks. Simultaneously, a group of 15 OECD countries has met on several occasions to assemble an aid package of commodity, export and financial credits to be made available to Yugoslavia during 1983 and 1984. Agreements have now been reached in principle on a package of foreign assistance which has the following major elements: - $2.0 billion gross from approximately 500 foreign banks, of which $0.6 billion will represent an increase in net exposure, and the remainder will equal amortization payments coming due in 1983. - $2.0 billion in revolving short term credits extended for two more years to the National Bank of Yugoslavia; and - $1.35 billion in government supported commodity/export/financial c-edits. The Yugoslav authorities also consider lending from the European Investment Bank and the World Bank to form part of the package. Including proceeds from the proposed structural adjustment loan and the third year of the IMF standby, total foreign assistance being provided to Yugoslavia during 1983 would amount to about $6.5 billion. Representatives of the OECD countries concerned and the commercial banks have indicated that they regard Bank support to Yugoslavia in the form of the proposed structural adjustment loan (SAL) as an important complement to this package. PART II - THE STRUCTURAL ADJUSTMENT PROGRAM A. Introduction 16. The Federal Five-Year Plan for 1981-85 was adopted in March 1981, but its assumptions were soon invalidated by developments in the domestic and international economy, including the sharp acceleration in domestic inflation and the reluctance of commercial banks to increase their exposure in Yugoslavia. While intermittent attempts were made to revise the plan in 1982, the balance of payments situation remained too volatile for such an exercise to be completed productively, and the energies of policymakers were largely devoted to issues of short-term management. Despite this hiatus in the medium-term plan, considerable discussion continued to occur on the country's medium-term economic strategy and the reform of instruments, institutions and legislation that would be needed to bring about sustained and efficient growth. A high-level body of Yugoslav policymakers and academics known as the "Commission on Economic Stabilization" (henceforth the "Stabilization Commission") was formed in the second half of 1981 to prepare a comprehensive blueprint for reform in a wide variety of subject areas. 1/ The Commission issued a series of working papers over the course of 1982 and is expected to issue its final report by the middle of 1983. The Commission's proposals strongly support 1/ The term "stabilization" is used rather broadly in Yugoslavia to denote an overall policy of balanced development, rather than just the acbievement of internal and external macroeconomic balance. -7- a return to a more open economy, an export-led growth strategy and a greater role for the market in the allocation of resources within the economy. These proposals are generally in line with positions advocated by the Bank in its economic and sector wcrk in recent years. With the work of the Commission nearing conclusion, and with somewhat greater stability in the supply of foreign capital being previded through the multipartite financial package describe.d earlier, the exercise of revistng the medium-tenm plan has been resumed, with the intention of having the revised plan approved by the end of 1983. 17. The revised plan is intended to incorporate the proposals and recommendations of the Stabilization Commission. As such, even though the process of plan revision is still underway, the main directions of the revision are already clear. The goal of economic policy in the next two to three years is to put the balance of payments on a secure footing. This is to be done through continued reductions in domestic demand (particularly fixed investment, but also consumption) coupled with measures to switch resources into the export sector. In the transition to export-led growth, output growth rates are expected to remain low, and the availability of investment resources to be limited. Preliminary projections of the Federal Institute for Social Planning forecast social product growth of around 22 per year for the 1983-85 period. lerscnal consumption is projected to increase by about 12 per year, and fixed investment by 42 per year. Within the reduced investment program the priorities stressed are export promotion, the development of domestic energy resources and other selected raw materials, and primary production in agriculture. Investment in social services is to be cut back sharply, with 1=rticularly deep cuts being inflicted on non-housing investment. Given the growth and investment outlook, more emphasis is being laid on the development of labor intensive activities and small-scale enterprises, and the increased use of shift work. wvhile the main challenges for economic policy in the next two or three years are in external adjustment, the reduction of regional disparities remains a major objective of Yugoslavia's economic planning. Financial transfers between regions will play an important role in this process, with particular stress on encouraging social sector enterprises in the more developed regions (?iDR) to undertake joint ventures with enterprises in the LDR. 18. The program of reform being articulated by the Stabilization Commission is comprehensive and covers a wide range of economic and social activities. In defining the elements of a structural adjustment program more closely, for the purposes of designing an effective SAL, the Bank and the Government have concentrated on those areas of action which are most critical to Yugoslavia's adjustment efforts at the present time. In the l_ght of the acute foreign exchange shortage being experienced by Yugoslavia and the likely availability of external finance over the medium-term, the most urgent priority is the expansion of exports to the convertible currency area. Successful performance in this area is likely to evoke a more positive reaction from private capital markets, while - 8 - greater foreign exchange availability wil; facilitate import liberalization and permit restructuring of the economy according to its international comparative advantage. A better expor, performance will require immediate measures to improve the availability of imported inputs to exporters, the incentive framework facing thcm and ::ome aspects of the institutional structure supporting them. Concurrently, it will be necessary to address the deteriorating efficiency of the Yugoslav economy as reflected in stagnating total factor productivity over most of the 1970s. This requires sustained attention to the investment program in aggregate and in major sectors, and to the incentive and institutional framework governing investments. It also requires action on removing price distortions in certain key areas, while moving to increase the financial accountability of enterprises and their responsiveness to market signals. 19. Accordingly, the main areas that have been selected for action in the structural adjustment program are: - investment planning and resource allocation; - foreign exchange allocation and external trade policies; - price policies and enterprise decision-making. These areas for action at the economy-wide level vill have an impact on resource allocation in all sectors of the economy, but will particularly effect the industrial sector, whose role in the adjustment effort is paramount, especially in the short-term. These measures at the ecomomy-wide level will, however, be supplemented by a limited number of sector-specific measures in the important sectors of agriculture and energy. 20. It is recognized by both the Bank and the Yugoslav Government that restructuring the economy is a process that, while already underway, will take time and that action will need to be undertaken in a phased fashion. In several areas (for example exchange rate and interest rate policy) action has already begun to be taken, or can be taken quickly; in others the need is to define a detailed implementation program; in yet others while the general nature of the problems is known, the detailed basis for policy reform needs still to be established through studies. The adjustment program described below (and summarized later in Table 1) accordingly combines steps already taken and to be taken with measures designed to lay the basis for action in the future. B. Investment Planning and Resource Allocation lItroduction 21. Several weaknesses in the area of investment policy were evident through the 1970s, and were responsible for poor economic performance at both the macro and micro levels. The system of self-management planning - 9 - practiced in Yugoslavia in the 1970s placed primary responsibility for the aggregate balance between demand and supply of investment funds, and their allocation between users, on a system of multilateral negotiations between planners, banks, enterprises and political bodies. At the same time the use of realistic capital pricing through appropriate interest rate policies was neglected as a mechanism for allocating capital, on the grounds that this role for interest rates was redundant in a planned environment. 22. In practice, however, the self-management and planning machinery intended to perform the rationing function proved to be inadequate for the task. Enterprises and commnues were able to gain approval for too many projects, including sevaral which were not well-conceived nor fully financed. As a consequence the size of the investment program launched between 1977 and 1979 overwhelmed the administrative and financial capacity of the country: investment resources were spread too thinly over too many projects, and the capacity of tne local construction and equipment supply sectors was overstretched. Ihis process led to delays in completion and escalating cost overruns, and was exacerbated by shortages of foreign exchange and domestic funds toward the end of the last plan. At the same time some projects were launched which were not warranted by the needs of the national market nor internationally competitive. Ongoing Investments 23. Ihe view that the overall share of investment in domestic absorption was unsustainably high is fully consistent with those of the the Stabiliz.ation Commission and the Yugoslav Government. As mentioned already (para. 12) the stabilization effort has already been marked by sharp cuts in in-estment, and further reductions are proposed for 1983. Despite these cuts rationalization of the investment program in the main productive sectors is still underway and is to be completed when the revisions of the plan are finalized later this year. While the responsibility for making decisions on sectoral priorities lies with disparate bodies within Yugoslavia, the Federal Government has designed a series of instruments to facilitate a dialogue between the Bank and relevant bodies in Yugoslavia as the decisions on the investment program as a whole and in key sectors are made over the course of this year. This dialogue will permit the Bank to form a judgement on the restructuring effort being proposed, and will allow the Bank to make a technical contribution to this effort. 24. First, by the end of September 1983 the Yugoslav authorities have agreed to provide the Bank with the draft revisions of the medium-term plan, including the technical documents which underlie it. These documents will be discussed between the Bank and the Government and would be expected to be submitted to Parliament before the end of the year. The adequacy of progress in finalizing the revision of the 1981-85 five year development plan, including a definition of sectoral and sub-sectoral priorities would be a condition for releasing the second tranche of the SAL (Section (e)(ii) of the Schedule to the draft Guarantee Agreement). Second, understandings - 10 - have been reached on a system for mcuitoring the progress of various aspects of the investAent program of importance to the Government and the Bank. Beginning in August 1983 and at least semi-annually thereafter, the Government will provide reports on the progress of the investment program to the Bank. The adequacy of progress in monitoring investment expenditures incurred during the previous six-month period would be a condition for releasing the second tranche of the SAL (Section (b) of the Schedule to the draft Guarantee Agreement). To comply with this condition the Government would submit a first semi-annual progress report to the Bank. This as well as future reports will show: (i) the sectoral allocation of investment expenditures in relation to agreed plan targets; (ii) progress of expenditures on all ongoing large projects (those with a total investment cost of 750 million dinars - these account for about 50% of the current investment program); and (iii) information on new projects, including after April 1984, estimated economic rates of return calculations for all projects over 750 million dinars in the economic sectors. 1/ These reports will permit an assessment of the progress of the investment program, and in particular, the effectiveness of the instruments being deployed by the Government in ensuring quick completion of large and high priority investments. While in general Yugoslav constitutional arrangements do not empower the Government to differentiate between priority and non-priority investment projects 21 within sectors, the institutional organization of the .-tergy sector does permit this distinction to be drawn. The Government therefore will provide to the Bank a list of ongoing investments which are considered to constitute the core program in the energy sector. The definition of the program of priority investment projects in the energy sector for the period 1983-1985, required to -chieve planned targets, would be a condition for releasing the second tranche of the SAL (Section (a) of the Schedule to the draft ';uarantee Agreement). The progress of these projects will be monitored particularly intensively. New Investments 25. In addition to rationalizing ongoing investments, the Yugoslav adjustment program includes a set of measures designed to improve the quality of decisions made on new investments in the economy in a fashion 1/ Yugoslav economic and social activity is classified into so-called 'economic', and, 'non-economic' sectors, the latter consisting of social sectors such as health, education, culture, and government administration. 2/ Under the Yugoslav planning system, the republics and provinces agree at the beginning of each five-year plan on a set of economic sectors whose accelerated development is in the national interest. These sectors are called the priority sectors and special efforts are made to direct finance to them. In the 1976-80 plan such priority sectors received roughly 60% of total investment resources going to the economic sectors, or about 36% of total fixed investment. - 11 - consistent with decentralized decision-making. This is being achieved both by strengthening the institutional framework for initiatijag and appraising investment projects, and by moves toward a more realistic pricing of capital. These measures, when taken together with the measures discussed later to increase the accountability of enterprises for their decisions, should result in better investment decisions being taken than in the past. The impact of these steps on the efficiency of the economy would necessarily be gradual, but the cumulative impact over time is expected to be significant. 26. Several measures have already been taken to improve the institutional and legal framework for investment decisions. Legislation was passed in 1982 which requires investors to demonstrate assured sources of financing before initiating investment, as well as regulating, for different sectors, the minimum contribution that must come from the enterprise's own resources. Other legislation passed in 1982, and effective in February 1983, requires obligatory registration of all investment projects above 100 million dinars with the Chambers of Economy. 'Work is nearing completion on a Social Compact on the Criteria for, and Evaluation of, the Socio-economic justification of Proposed Investments which will establish, at the federal level, a number of minimum criteria to be met by projects throughout the country, and mechanisms for the institutional implementation of these criteria. These criteria will include, for the first time, an economic rate of return (following World Bank methodology) for all investment projects in the economic sectors covered by the Social Compact. The definition of the economic rate of return would be agreed with the Bank prior to finalization of the Social Compact. The conclusion of the Social Compact would be a condition for releasing the second tranche of the SAL (Section (e)(i) of the Schedule to the draft Guarantee Agreement). The Social Compact will also provide for the establishmenc of an interagency review panel in each republic and province, which will assess the justification of each investment in the light of ti-ese criteria. This assessrsent would then be available to all participants in the investment decision process including the Workers' Council of the BOAL, other affected BOALs, planning bodies and banks, as an element in their decisions. Effective implementation of these criteria will require siguificant training or strengthening of the staff in the Chambers of Economy and the comercial banks. A phased program for implementing these procedures and upgrading staff is to be developed so that by December 1984 Federal and regional Chambers of Economy Lnd commercial banks will have sufficient trained staff in place to implement tully these investment review procedures. 27. In addition to these indirect measures, the Covernment has invited the Bank to participate with the appropriate bodies in Yugoslavia in joint studies of investment strategy in selected industrial subsectors. The choice of modalities, studies and subsectors will be discussed with the Bank in September 1983. The Bank would consider supporting such studies with its financial assistance; the studies could provide a basis for future Bank lending to the respective industrial subsectors. - 12 - Interest Rate Policy 28. The issue of negative real interest rates has figured prominently in the economic dialogue between Yugoslavia and the Bank for many years. Yugoslavia's position traditionally was that interest rates should not be a determining factor in investment planning, since this would preempt the dominant role of social planning and group consensus in determining investment allocation. The view that interest rates must play an economic rcle, even in the system of social planning, has gained increasing acceptance in Yugoslavia and has made its way into the 1981-85 Federal Plan, the resolutions of the National Assembly and the recommendations of the Stabilization Commission. In consultation with the IMF, the YBA and the National Bank of Yugoslavia (NBY) have conducted a series of reviews of the interest rate structure over the past year, and significant increases in the structure of deposit rates and rediscount rates were implemented in March and October 1982 and again in February 1983. Following these changes, commercial banks raised their lending rates accordingly. The medium--term objective is to introduce a structure of positive real interest rates 'vy making gradual adjustments in nominal rates while, concurrently, reducing inflation. To achieve this objective the government has decided, for the first time, to establish floor lending rates for all new credits financed from the resources of the commercial banks. This rate would take effect on January 1, 1984. The current intention is to establish this rate at not less than 18%; however, should inflation (as measured by the rise in the producer price index) exceed 18% in 1983, the floor rate would be raised by one-third of the difference between 18% and the twelve-monthly rate ot inflation in 1983. The level of the floor rate would be raised annually in subsequent years with the aim of reaching positive real interest rates defined in relation to the higher of either the increase in the producer price index or the retail price index within two years from the introduction of floor interest rates for lending to non-economic sectors and within three years for lending to economic sectors. 29. With a view to maintaining a certain degree of additional support tor activities which are particularly important in the adjustment process, the following exceptions to the above policy will be made: (a) all export credits; (b) all short-term credits for agriculture approved within the framework of the selective credit policy of the NBY; (c) investment credits for primary agricultural production (cereals, milk, meat, industrial crops and conditions for significantly increasing their production, that is large irrigation and drainage works, land consolidation and bringing new land under cultivation); - 13 - (d) investment credits for other priority activities which will be defined and identified in the Amendments to the Social Plan of Yugoslavia for the 1981-1985 period; and (e) resources paid into the special funds for accelerated development of less developed regions at the level of the Federation, Republics and Autonomous Provinces, as well as resources associated in the form of joint ventures in accordance with the existing system of stimulating the development of these regions. In the case of the exemptions provided for under (c) and (d), the aim is to reach positive real interest rates in relation to the higher of either the increase in the producer price or the retail price index within five years. In view of the non-intermediated nature of the investment funds provided to the LDR by the Federal Fund for the Accelerated Development of the LDR (see para. 7), and given the intention to move increasingly to inter-enterprise joint ventures as the mechanism for interregional resource transfer, resources from the Federal Fund will be exempt from the program for achieving positive real interest rates. The combined total of Federal Fund credits and credits under items (c) and (d) above is not expected to exceed 25X of total investment in Yugoslavia during 1983-85 and will be limited to 25% of domestic bank investment credits from 1986. Financial Planning 30. A further set of measures to be introduced involves improvements in financial planning by the commercial banks. All dinar credit for investment in Yugoslavia is channelled through the commercial banks, who have the responsibility for ensuring that their aggregate commitments are consistent with the resources available to them. The banks have, by law, hitherto undertaken their forward budgeting in constant prices except for the current year; while this procedure was satisfactory at a time of low inflation, it has seriously disrupted liquidity management at a time of variable and at times relatively high inflation. While no system of planning can fully cope with such uncertainty, the YBA, in consultation with the Federal Institute for Social Planning, will no later than the end of 1983, propose an appropriate methodology to enable the banks to make their financial and operational projections at current prices starting in 1984. Adequate progress in improving financial planning procedures for commercial banks would be a condition for releasing the second tranche of the SAL (Section (e)(iii) of the Schedule to the draft Guarantee Agreement). In this connection, the Institute for Social Planning intends to provide, starting at the end of 1983, the necessary medium-term assumptions to be used by all banks in preparing their financial and operational projections at current prices. To further improve the liquidity and accountability of the banks, the Government is taking measures to enforce the law requiring that the banks maintain a reserve fund ana a joint liability fund, each equivalent to 3X of their total - 14 - investments at the end of the preceding year. To this end banks will be required to set aside a portion of their net income until their statutory obligations are met, over a period of six years. C. Foreign Exchange Allocation and Exteraal Trade Policies Foreign Fxchange Allocation 31. Yugoslavia has one of the most complex trade and payments regimes of any country. 1/ Nominal tariff rates are at reasonable levels, with the highest published tariff at 25%, and the average tariff rate around 10% in recent years. The formal quantitative restriction regime is also not excessively restrictive, with the value of non-oil imports subject to quantitative restrictions declining fom an estimated 42Z in 1977 to 34Z in 1980. However, a major source of distortion in recent years has been the mechanism for allocating foreign exchange among regions and enterprises. The Law on Foreign Exchange Operations and Foreign Credit Relations of 1978 was intended to reflect the principles of self-management in the sphere of foreign exchange allocation, by placing the primary responsibility for external payments balance on the enterprise sector directly, with minimal interference by administrative bodies. Under these arrangements institutions called Communities of Interest for Foreign Economic Relations (CIFER) were established at the level of each republic and autonomous province, and at the Federal level. The CIFER provided a forum where enterprises and other interested bodies (such as social and political communities) could reach agreement on the criteria by which foreign exchange inflows and foreign borrowing rights were to be distributed. To facilitate this process the balance of payments forecast for the country was further divided into balance of payments positions for each region, and these positions were the basis for allocation of foreign borrowing rights. 32. While this was not the intention, the practical effect of these arrangements was to restrict the interregional flow of foreign exchange. This was partly because the official exchange rate was substantially overvalued in the period after the law's introduction; one consequence was that the interbank foreign exchange market atrophied. In addition the different allocation criteria used in each regional CIFER resulted in a great diversity of effective exchange rates across sectors and regions, with resulting loss in allocative efficiency. Equally, the degree of protection afforded to domestic producers varied across the country and over time, as the protection provided by the implicit or explicit rationing of foreign exchange varied. 33. The adverse consequences of this system of foreign exchange allocation and the need for a less fragmented foreign exchange regime have 1/ A fuller account of this system, and of its allocative implications can be found in Report No. 2972-Y-U, Yugoslavia: Export Performance and Policies, October 16, 1980, and Report No. 3954-YU, Adjustment Policies and Development Perspectives (ibid.) - 15 - been major themes of the Bank's economic dialogue with the government in the last three years and is the focus of the Computable General Equilibrium (CGE) mcdel of Yugoslavia developed in the Bank, now being transferred to Yugoslavia (see para. 69). Equally, the Stabilization Commission has argued forcefully for a return to a genuinely unified exchange rate and to a limited form of current account convertibility for the dinar. However, given the degree of disequilibrium in the foreign exchange market that has arisen, elimination of these distortions is a process that will take two or three years. 34. In consultation with the ILMF, the Government is now following a considerably more active exchange rate policy. As noted in para. 10, the dinar depreciated by 49% against the US dollar in 1982 -- a 12% real davaluation -- and has continued to depreciate in the first half of 1983. These movements more than offset differential inflation between Yugoslav-a and its trading partners. More appropriate foreign exchange pricing will itself help to improve the efficiency of foreign exchange allocation. Second, as an interim step to improve the interregional flow of foreign exchange, the Law on Foreign Exchange Operations and Foreign Credit Relations of 1978 was amended at the end of 1982. The main effect of the amendments is to transfer responsibility for foreign exchange allocation from the regional CIFER to the Federal CIFER, in conjunction with the Federal Chamber of Economy. At the same time the calculation of individual balance of payments positions for the republics and provinces has been abolished; instead, foreign exchange allocation is to be determined within industry associations operating at the Federal level. This new system of foreign exchange allocation has only recently beer initiated, and there are as yet uncertainties on its functioning and impact. However, with the finalization of the international financial assistance package referred to earlier, the situation as regards foreign exchange availability is now somewhat easier than had been anticipated when the amendments to the law were prepared. It should therefore be possible to move relatively quickly on further reform of the system. The Government intends to establish, by the end of June 1983, a monitoring group to assess the operation of the current system, which is to report by September 1983. The report, which would be discussed with the Bank and the IMF, will include a program to increase foreign exchange mobility further by encouraging voluntary sales of foreign exchange earnings by exporters. This program would be implemented starting in January 1984, with a view to achieving substantial liberalization of the foreign exchange allocation system over the next two years. The adequacy of progress in monitoring the operation of the system of foreign exchange allocation and in the formulation of a program aiming at an increase of foreign exchange mobility would be a condition for releasing the second tranche of the SAL (Section (c) 6f the Schedule to the draft Guarantee Agreement). External Debt Monitoring 35. To assist in better planning of the country's foreign exchange transactions the Government has embarked on a program to improve the - 16 - monitoring and reporting of its foreign payments. One element of this program is the conversion of the country's balance of payments accounting from a system of statistical exchange rates to one of current exchange rates, which takes better account of movements in exchange rates between foreign currencies. This will both permit a better picture of the balance of payments accounts and a better reconciliation between these accounts and foreign exchange cash flow management. An additional element in the program is completing computerization of the system of external debt reporting, which has been underway for several years. The Government intends to provide the resources necessary to ensure that this system is functional by the end of 1983, and the Bank, in consultation vifh the IMF, will be collaborating with the NBY to agree on reporting formats and a timetable that will provide a suitable test of the system, while providing information of use to the Bank and the Yugoslav authorities. Export Promotion 36. Given the importance of additional exports, particularly to the convertible currency area, a major component of the adjustment program are the measures being taken to achieve this objective. There is an immediate requirement for foreign exchange by exporters to enable them to import raw materials. Steps were taken to provide this in the second half of 1982, when exporters were permitted to retain foreign exchange in excess of the amounts ailocated to them by the regional CIFER, for purposes of meeting confirmed export orders to the convertible currency area. The funds being made available under the proposed SAL would be used to finance an Export Development Pund (EDF) to meet the import needs of exporters (including exporters of capital goods and contractual services) to the convertible area. The EDF would be administered by Udruzena Beogradska Banka (UBB), one of the largest Yugoslav banking groups. Operations of the EDF to be financed from SAL proceeds are further discussed in Part III and Annex V. In addition the government has indicated that funds being provided in the form of commodity credits under the intergovernmental assistance package (see para. 15) will also be used to finance similar export development funds located in other banks. In this way the most immediate constraint inhibiting exports to the convertible currency area should be relieved. 37. An important component of Yugoslavia's exports are its exports of capital goods, turnkey industrial projects, civil works and other services, particularly to the developing countries. Yugoslavia has had well-developed institutional arrangements for providing medium-term credits in support of these exports for some time. In 1980 a new institution called the Yugoslav Bank for International Economic Cooperation (YBIEC) was established to take the lead in export credit refinancing, insurance and market information activities related to exports of capital goods and services, together with a range of other functions. The YBIEC provides dinar rediscount facilities to exporters of capital goods; in turn it receives its own funds through a combination of credits from the National Bank of Yugoslavia, the pooling of resources by its member organizations, - 17 - and repayment of past credits. The Government intends to take such action as is necessary to ensure that adequate funds are made available to the YBIEC in 1984 and 1985 for it to support the activities of Yugoslav exporters of capital goods and services. In addition an action plan is under preparation to strengthen the institutional capability of YBIEC, particularly with respect to market information for capital goods and engineering exports. More generally, while a broad array of institutions in Yugoslavia are engaged in export promotion and marketing, there is scope for increasing the efficiency of this effort. By June 1983, a working group is to be established within the Federal Secretariat for Foreign Trade to review current activities in this area and the coordination among the various institutions involved, in order to prepare recommendations for action. Trade Incentives 38. Concurrent with these activities to strengthen the institutional infrastructure for exports, the system of incentives provided to exporters needs to be revised. The present system is a patchwork of measures at the Federal and regional levels, and therefore differs in its impact from region to region; in addition, multiple forms of export subsidization have become necessary to compensate for the increasing over-valuation of the exchange rate. This structure of export incentives does not promote exporting on the basis of efficiency or comparative advantage, and a review of the export incentive system has been underway for some time. A revised system of export incentives is now under preparation and will be discussed with the Bank prior to its implementation in 1984. Thl.s revision will take account of the fact that with a more realistic exchange .ate there should be less need for export subsidization. The revision will also aim to ensure uniformity in treatment of products, to relate incentive levels to the value of net foreign exchange earnings per branch (so as to encourage export specialization) and to provide duty-free access to imports for efficient exporters. Exporting on the basis of c:nparative advantage would be further encouraged by a return to a more liberal import regime. While current foreign exchange availability does not make this a feasible prospect at present, the Government is making a beginning by reducing the value of goods subject to quantitative restrictions. The program, which would be prepared1 by September 1983 for implementation starting in 1984, would reduce goods subject to quantitative restrictions (excluding oil imports) to no more than 20% of total imports. To guide import liberalization in the future, and to establish a medium-term framework for export incentives, the Government intends to undertake a study of effective protection and comparative advantage. Terms of reference for this study have been prepared in consultation with the Bank, and the study will be completed by April 1985, in time for it to guide commercial policy and investment incentives in the 1986-90 plan. - 18 - D. Price Policies and Enterprise Decision-making The Regulatory Framework 39. A major objective of Yugoslavia's structural adjustment program is to increase the role of world market prices and domestic market forces in price formation. An appropriate pricing structure is also a precondition for eitablishing greater enterprise accountability, since it is difficult to hold enterprises responsible for losses when prices are held at uneconomic levels. As elimination of price distortions generally involves corrective increases for prices which have been allowed to lag behind the rate of inflation, in the short run such changes can conflict with another objective of government policy, that of reducing the rate of inflation. For this reason the Yugoslav authorities have adopted a gradualist approach to correcting major price distortions. 40. The basic legal framework for Yugoslav price policy is provided by the Law on the Bases of the Price System and Public Price Control of 1980. This law provides for the establishment of comnunities of interest for prices at the communal, republican/provincial and Federal levels to conduct public price control. Under this law workers in BOALs were to set tLe prices of their products in accord with certain specified criteria. However, if the public interest so warranted, sociopolitical communities at each level of the federation could mandate that self-management agreements and social compacts be concluded, or take steps to regulate the prices through the appropriate community of interest (COI) for prices. In effect prices fall into three categories: those regulated at the Federal level through the setting of price ceilings, those for which price ceilings are set at the republican, provincial or local level, and those determined by BOALs without the intervention of the COIs for prices. 41. On July 31, 1982, under an exceptional provision of the 1980 price law, the Federal Executive Council transferred the authority for price regulation from the republican, provincial and local price communities to the Federal Community for Prices and mandated it to fix ceiling prices for all goods and services except for those sold on farmers' markets. During the subsequent six months the Federal Community for Prices had the sole authority to grant increases in price ceilings for the controlled goods and services. The selective price "freeze" was extended for a further six months on January 28, 1983, but authority to grant price increases for some products was restored to the republican and provincial price communities. In the first quarter of 1983 the price ceilings of some key goods and services were increased between 25X and 35X. These included electric power, coal, petroleum products, railway transport, rents, and some food items. 42. On January 31, 1983 a Social Compact on Price Policy for 1983 was signed establishing procedures for gradually pnasing out ceiling prices for most goods and services. In accord with this social compact, the number of - 19 - goods and services suLject to price ceilings is being progressively reduced, and long-term price policies are being prepared in the energy, ferrous and non-ferrous metallurgy, basic chemical, agriculture, forestry, and rail transport sectors. By the end of September 1983 these long-term price policies will be established and amendments to the 1980 price law will be passed to increase the role of world market prices and domestic market conditions in price formation and to reduce the nuober of commodities subject to review by the republican and provincial price communities. In May 1983 the Federal Executive Council freed a substantial share of industrial products from direct price control. A timetable is to be discussed with the Bank h- September 1983 for further price liberalization in 1984 and 198$ so that by the end of December 1985 only a limited number of defined goods and services will be subject to review by price communities at all leveib. Sectoral Pricing Issues 43. Energy Pricing. Under current energy pricing policies, the prices of all petroleum products are at or above their respective border prices. Within this structure, liquified petroleum gas (LPG), gasoline and diesel/ gas oil, which are used mainly by the household and transport sectors, are heavily taxed, while prices of fuel oil and aviation fuel are maintained near parity with border prices. In January 1983, the weighted average price for petroleum products was about Din 25,200/ton (US$437/ton) compared with al- average weighted border price of about Din 14,100/ton (US$235/ton). Further increases ranging between 15% and 402 were announced in April 1983. The Government intends to maintain this price structure in real terms by adjusting prices periodically to reflect world market trends, exchange rare changes and domestic inflation. 44. The pricing of natural gas in Yugoslavia differs between imported and domestic gas, and, in the latter case, between the end-uses of the natural gas. In 1982, imported gas accounted for 56% of the total consumption of natural gas. All of this gas is imported from the Soviet Union, on the basis of prices and quantities set in a five-year contractual agreement. Under this agreement, Yugoslavia pays a price for natural gas which is pegged to the price of fuel oil. In December 1982 this price was Din 9.43/m3 ($182.8/toe). In the case of domestic natural gas, there are two different prices charged. Gas used for feedstock is set below its price when used as a source of primary energy. In December 1982, the price charged for domestic gas when used as a source of primary energy was Din 5.36/m3 (US$103.9/toe), while gas used as feedstock was pricsd at Din. 3.E.im3 ($71/toe) for nonfertilizer uses, and at Din. 4.89/mn '$94.7/toe) for fertilizer production. 45. These differentials between the prices of imported and domestic gas are unjustified on economic grounds. They encourage uneconomic use of domestic gas and distort the structure of gas prices relative to the prices of competing petroleum products. Moreover, revenues accruing to work - 20 - organizations responsible for exploration and development of domestic gas have been insufficient to provide resources for the development of proven gas fields, which are therefore lying unexploited. Meanwhile, however, the increased demand for natural gas stimulated by low domestic prices has been met by increasing imports. The Government has now embarked on a program to correct relative price differentials in energy. Ir this context it intends to increase the price of domestic natural gas to world levels. Gas prices were substantially increased in May 1983. Further annual adjustments in real terms are intended to ensure that the price of domestic gas reaches parity witlh the price of imported gas by January 1987. The views of the Bank will be taken into account in determining the phasing of such increases over the period. 46. The pricing of coal has so far been undertaken on an ad hoc basis, particularly in the case of mines producing mainly for the supply of power stations. Sale of coal and lignite to power stations is undertaken on the basis of trar.fer prices which are set to ensure that the operatior of power stations is viable. This has been partly responsible for the development of mines which fail to capture economies of scale and the construction of power plants that are not dictated by least cost considerations. Coal prices have generally not been adequate to provide the cash needed to finance the expansion program. The authorities have recently required the coal subsector to generate 40Z of the resources needed to finance its investment program. In addition, 10% of the revenues collected by taxing petroleum products are now channelled to finance the development of the coal mining industry. 47. In order to provide the proper signals to the enterprises, the price of coal and lignite should be set equal to the average long run marginal cost of supply, adjusted for the financial target set by the authorities. However, before this pricing policy can be implemented, a methodology for determining long-run marginal cost needs to be developed and adopted by all republics and provinces. The authorities intend to initiate by September 1983 and complete by December 1983 a study to establish the methodology for pricing coal and lignite in accordance with terms of reference to be reviewed with the Bank. The results of the study and the recommended pricing measures will be discussed and reviewed with the Bank in January 1984. They would then serve as a basis for setting future coal pricing policies such that the long term price policy will be fully implemented by December 1987. 48. Average electricity tariffs for the major consumers (bulk, medium voltage, etc.) in the republics and provinces are between 38X to 65% of the economic cost, depending on the consumer category. The power subsector has experienced severe delays in implementing the investment program for 1976-1980 mainly because of a shortage of financial resources. This has been primarily due to the inadequacy of the prevailing tariffs. Moreover, despite the deceleration of economic growth between 1979 and 1980, the growth of electricity consumption has remained unabated, largely as a - 21 - result of the low price of electricity relative to other competing energy sources. To correct the distortion in the pricing of electric energy and to secure the revenues needed to implement the investment plans of the power subsector, the average electricity tariff in each republic and province will be moved to achieve parity with economic prices over a period of 4-5 years. As a first step electricity tariffs were increased by 252 in March 1983. A further increase in tariffs is intended in January 1984 to raise tariffs by 15% in real terms (over the rise in producer prices since April 1, 1983). Increases in real terms, at least on an annual basis, are intended thereafter to achieve electricity prices equivalent to the long-run marginal cost of supply throughout Yugoslavia within 5 years. The Yugoslav power sector will develop by January 31, 1984, in consultation with the Bank, a methodology for calculating long-run marginal cost specific to the particular circumstances and resource endowmen's of Y-.goslavia. The level of the annual real adjustments in tariffs will annually be agreed upon with the Bank prior to the increases being put into effect. 49. Other Sectors. In agriculture, the purchase prices of major commodities are subject to Federal regulation. At present this pricing structure broadly reflects world prices. The intervention prices are normally set in September for the coming year and in most cases are below market prices at the time of harvest, serving primarily as a guide to farmers at the time of planting and as a floor for the market price at the time of harvest. This policy framework will continue to apply but will take more explicit account of projected exchange rate changes than has been the case in the past. 50. A major issue in the transport sector has been the development of a tariff and pricing structure which promotes efficient utilization of the transport network. During the last two years, increases in railway tariffs have failed to keep pace with inflation, and compensation levels have increased. Gf. the other hand, motor vehicle registration fees and overall taxes on motor fuel are set at realistic levels which are comparable to those in most Western European countries, and are even higher in the case of heavy vehicles. The main issue for road infrastructure relates to the current inability of the highway authorities to fund a reasonable level of road investments. This situation has resulted from the fact that general budgetary contributions for road expenditures have virtually ceased and the highways authorities now depend heavily for their revenue on the receipts l/ In each region a community of interest (COI) comprising the regional railway transport organization (RTO) and its users has been established with responsibility for the development and implementation of railway policies, including traffic, financing and investment plans. In order to fill the gap between tariff-generated revenues and operating expenses, compensation payments are raised in the form of a levy on the members of the COI. This levy is based on the enterprise income of COI members and not the actual costs incurred by the particular RTO for carrying traffic on their behalf. - 22 - from part of the tax on fuel. These receipts have not kept pace with inflation, at a time when the authorities have had to devote a larger part of their receipts to defray the higher service burden on foreign debts resulting from the depreciation of the dinar. 51. To address these issues, the long-term price policy in railway transport will provide for annual tariff itcreases above the annual rate of inflation such that compensation payments to all RTOs will be eliminated by the end of 1990, with some minor exceptions possibly occuring in the RTOs serving Kosovo and Montenegro which account for only 3% of total railway traffic. Toward attaining this objective, railway tariffs were increased by 17X in December 1982 and 15% in February 1983. The Government intends to increase railway tariffs by 10 in real terms in January 1984 (i.e., over the rise in producer prices during 1983), and by at least 6Z in real terms every January thereafter to ensure that the level of compensation payments continues tc decline over the previous year. The issue of railway tariffs and compensation payments will remain subject to review between the Bank and the Yugoslav authorities. For road user charges, the Government in April 1983 increased the fuel tax earmarked for the highway authorities by 3.2 dinars/liter for regular fuel and by 3.4 dinars/liter for premium fuel. Its longer term policy is to adjust road user charges in line with inflation in order to provide adequate funds for priority programs of road investment and maintenance. In addition, at the time of increases in fuel prices, the portion of these prices earmarked for road user charges will be adjusted in accordance with the price policy then in force. In this context, the Council of Republican and Provincial Self-managing COIs for Roads will prepare, by September 1983, a study defining a program of road maintenance and rehabilitation requirements. Enterprise Decision-making 52. Successful implementation of Yugoslav's structural adjustment program requires increased financial accountability of enterprises. without effective sanctions against loss-making enterprises, the allocative gains from the greater reliance on markets and economic prices that is planned, will be lost. In addition, excessive enterprise losses have important implications for incomes policy, monetary policy, price behavior and resource mobilization. The issues of enterprise losses and the establishment of an equitable program of rehabilitation have featured prominently in the work of the Stabilization Commission. 53. In the past, enterprises which have incurred losses 1/ have had recourse to a wide variety of sources for covering their losses. These 1/ An organization is regarded as having incurred a business loss if, according to its annual balance sheet, it has not received sufficient income a) to cover amounts spent on personal incomes provisionally accounted and paid out, or b) to pay statutorily guaranteed personal incomes for the accounting business period for which personal incomes have not been provisionally accounted or paid, or for which statutorily guaranteed personal incomes have not been paid. - 23 - have included: the enterprise's own reserves; reserves of other BOALs to which they are linked by self-management agreements; "solidarity contributions" from other enterprises which are important suppliers and customers; pooled reserves at the commune and republican/provincial level; bank loans and reschedulings; writeoffs of debts; postponement (or cancellation) of tax and contribution obligations to sociopolitical communities and communities providing social services. In addition, enterprises have been able to pay for goods and services by issuing promissory notes and other forms of deferred payment which they have not always executed when due. Bankruptcy and liquidation, while legally possible, have been rare. For all Yugoslavia, total losses of social sector enterprises have ranged between 12 and 1.5Z of GDP in recent years, with the experience of the LDR being considerably worse than that of the MDR. 54. The Law on Rehabilitation and Liquidation of Organizations of Associated Labor of July 1980 provides the basic legal framework for enterprise rehabilitation and bankruptcy. This law became effective on December 31, 1980, and has since been amended twice. The law established an automatic timetable for closing loss-making organizations which cannot arrange for financial support for their rehabilitation programs. It also provides for the reduction of personal incomes of workers in loss-making organizations, and participation by banks and other entities in the design and monitoring of rehabilitation programs and in establishing responsibility for the source of the losses. Further amendments to this law are currently under preparation, which would strengthen the role of outside bodies in the design, execution and monitoring of rehabilitation programs, and would increase the pressure of loss-making enterprises to improve efficiency. In addition, amendments to the Law on Payments of 1975 are under consideration which would restrict tbe growth and nature of interenterprise credit outside the banking system arising from trading operations. in their Letter of Intent to the IMF the authorities have indicated their intention to reduce the level of uncollected bills outstanding and not covered by instruments of payment at the end of 1983 by at least 50 million dinars compared with the level at the end of 1982. Additional measures are to be taken by December 1983 to limit the aggregate value of payments to cover operating costs of loss-making enterprises. The Government's goal is to restrict the nominal value of such financial support from common reserve funds of sociopolitical communities and communities of interest to their nominal 1983 level in both 1984 and 1985. This would imply a substantial decline of such support in real terms. Sectoral Issues Energy 55. Yugoslavia's main commercially exploitable energy resources are of lignite, brown coal, hydropower, oil and gas. In 1976 a 10-year plan was prepared for the accelerated development of domestic energy resources to - 24 - reduce dependence on imported oil and gas. This plan served as a basis for the 1976-1980 five-year plan, which projected a substantial drop in the level of oil and gas imports. Instead, Yugoslavia's dependence on imported energy increased, so that by 1980 imports accounted for 40% of the total supply of energy compared with 34% in 1975. Moreover, over 50Z of the investment planned for 1976-80 had to be slipped to the 1981-1985 period. These developments reflected weaknesses in the policy framework, of which the most important were: (a) distortions in the relative price of various energy sources; (b) the absence of a well-functioning mechanism for selecting priorities and mobilizing resources for their implementation; (c) the failure of major energy consuming industries in formulating and implementing programs for restructuring energy use; and (d) the shortage of financial resources needed to finance the unrealistically large investment program for energy. 56. These shortcomings are addressed in the Government's program in several ways. As discussed already, the Government is now committed to a program which will realign prices of domestic natural gas and electricity to economic levels, and to undertaking studies which will establish methodologies for coal, lignite and electricity pricing. In addition, economy-wide reforms of commodity and capital pricing will have their influence on the energy sector as well. Notwithstanding these measures, there remains a need for Yugoslavia to identify high priority projects whose implementation would assist in achieving the revised targets of the 1981-1985 plan and the authorities have agreed to provide a core program which would encompass the major investments needed to achieve the planned targets for energy. These investments would be monitored by the authorities to ensure that necessary foreign exchange and local funds are made available for their quick completion. In addition, the Bank would periodically review the progress made in implementing these investments. 57. Energy Conservation. The industrial sector, which accounted for 66Z of total energy consumption in 1982, has been slow in formulating and implementing industrial restructuring programs involving energy conservation, rehabilitation of technologies and substitution of domestic for imported energy. In 1980, the Government formulated and adopted a policy framework consisting of 40 measures aimed at improving energy conservation and increasing the use of domestic coal and electricity. So far little has been done to translate these measures into actual investment plans. A pilot component for conducting energy audits and identifying energy saving investments in industry was included in the Bank's Industrial Credit VI project of 1982 (Loans 2132-YU and 2133-YU), which dealt witb industry in the republics of Bosnia-Herzegovina and Macedonia. The main constraints to the formulation and implementation of investment plans for energy efficiency at the level of the work organizations has been the shortage of foreign exchange needed to finance international consultancy services, and the reluctance by the communities of interest in the power sector to allocate their scarce financial resources to what they consider to be unproductive investments in restructuring projects. Unless resources - 25 - are made available to prepare the feasibility studies and projects for restructuring the major energy consuming industrial subsectors, Yugoslavia's success in reducing its dependence on imported energy would be limited. The Government has therefore indicated that it intends to request from the Bank a technical assistance loan to finance studies for the preparation of projects of energy conservation/conversion and substitution to domestic energy resources. These studies, which would cover only major interested energy consuming enterprises, would be carried out by experienced international consulting firms in consultation with Yugoslav firms. Terms of reference of energy conservation studies would be prepared for enterprises selected in consultation vith the Bank; the adequacy of progress in carrying out these studies would be a condition for releasing the second tranche of the SAL (Section (d) of the Schedule to the draft Guarantee Agreement). Once completed, the studies should provide a basis for developing a program for energy conservation/conversion which could be eligible for Bank financing. Agriculture 58. In Yugoslavia, the share of agriculture in social product and employment has declined steadily in the post-war period. The agricultural sector. however, remains important in the overall development of the econoumy, contributing about 12Z of social product, and engaging about 30Z of the country's active population. The agricultural sector accounts for the income of one-third of the population-a group which is largely rural, underemployed, and in the relative poverty target group with per capita income under US$850 per annum. In addition, the agricultural sector makes an important contribution to Yugoslavia's export earnings. The country has a large agricultural resource base, and its favorable climatic conditions have fostered the growth of a well-diversified agricultural sector with significant potential for future development. The sector is characterized by the co-existence of social and individual (private) sectors. About 83Z of agricultural land is owned and operated by nearly 2.6 million individual farmers, making it the only predominantly privately-owned sector of the economy. With an average family holding of around 3.2 ha, the individual sector represents about 95% of the total agricultural labor force, and accounts for about 852 of maize production, 60X of wheat, 752 of vegetables, and ownership of between 85% and 95% of all livestock. 59. In recent years Bank lending in agriculture has shifted toward projects which provide an integrated support system for individual sector farmers with particular emphasis on institution building and improved access to credit, other agricultural inputs and extension services. In recognition of the complex policy issues facing Yugoslavia in the agricultural sector the Bank is supporting a series of in-depth studies of agricultural development issues. Recently a study of agroindustry development was completed. This study, which is currently being reviewed with the Yugoslav authorities, provides a detailed assessment of Yugoslavia's agroindustrial capacities and its future investment needs. It - 26 - is envisaged that this study will form the basis for revisions of the 1981-85 plan for agricultural action programs which will be prepared for each branch of agroindustry by Novemer 1983 for implemenitation in the 1984 and 1985 annual plans in discussion with the Bank. The Bank is also engaged in a joint study of primary agricultural production with the Yugoslav authorities which examines the framework of agricultural policy and is expected to lead to concrete proposals for agricultural policy reform. The study will be completed by December 1983. Based on this study a working group will prepare by March 1984 a program for phased implementation. It is envisaged that the reforms will be supported within the context of a possible second SAL operation or future agricultural projects. E. Expected Effects of the Structural Adjustment Program 60. Table 1 summarizes the key features of the Government's adjustment program as discussed above, distinguishing between actions already taken, and steps to be taken. Within the latter category the table distinguishes between areas where a program of action is already defined, and those where the next steps consist of program development. Successful implementation of the adjustment program would restore equilibrium to Yugoslavia's balance of payments, by restoring rapid growth in exports to the convertible currency area. These conditions would facilitate a return to the international commercial capital markets under more normal arrangements, permitting a resumption in growth, investment and employment. During the next few years, balan'ce of payments considerations dictate continued stringent domestic demand policies. For this reason, the economy is expected to run at less than full capacity and the rate of growth of GDP is projected to average only one percent per year between 1983 and 1985; this reflects estimated negative growth in 1983, and a gradual recovery thereafter. Given the Government's efforts to ensure continued export competitiveness through frequent exchange rate adjustments and the other policy measures which are being introduced to promote exports, exports are projected to grow at a considerably faster pace over the next few years, particularly to the convertible currency area. This rise in exports will enable Yugoslavia to increase its imports and will facilitate a stronger revival in the rate of growth of the economy in the 1986-90 period. It is expected that the medium-term policies currently under implementation or under development will ensure that this recovery in economic activity is sustainable over the longer term and will be accompanied by improvements in the overall efficiency of the economy. - 27 - Table 1: SDUCTuRAL ADJUS7T LUAI PROGRA Structural Adiustment Program Sector and Policy Ineues Action Already Taken Steps to be Taken I. INVESTINT POLICY AND RESOURCE ALLCCATION Action C-) Revision of Investment Plan Tbere have been substantial The authorities are preparing a revised plan for che reductions in the volume of 1981-85 period to be finalized by the end of the investment in the le-t three year. Submission to Parliament of the Revised 1981-85 years. with especially deep cuts Plan is a condition of the second treanche release. imposed on non-economic Plan revisions are likely to assume continued inves tent. Strict budgetary implemntation of *tabilization policies and controls will be implemented restraints on the level of investment. It is expected during 1983 curbing investment that, wben taken together with investment cuts in 1981 expenditures in non-economic and 1982. the volume of fixed investment will be activities. For economic 20-252 lower than in the original five-year plan. The activities new investment laws details of the proposed amendments to the plan, with restrict the access of particular emphasis on the main development objectives non-priority inestors to bank and the priority sectors for investment, will be credit for financing cost submitted to the Dank no later than the end of overruns and raise September for discussion in October/November along self-financing requirements for vith the first semi-annual report on investment (see new projects. They are expected below). In addition, prior to adopting the annual to lead to a significant real resolutions on economic policy for 1984 and 1985, the reduction in investment Bank will be informed on the content and macroeconomic expenditures in non-priority assumptions on which the resolutions are bused, with investments, particular stress on the growth of investment, its financing, and its sectoral allocation in the relevant yer. There will be a full discussion and exchange of view between the Bank and the appropriate authorities. Work has begun on improving the syrtem of monitoring investment approvals and expenditures in both new and ongoing projects. Beginning August 1983 the Govern ent will issue semi-annul reports on invest ent which will show: i) sectoral allocation of investment expenditures in relation to annual plan targets; (ii) expenditures on individual large projects with a view to determining whether priority activities are accorded preferene; (iii) information on new projects including projected economic rates of return on all projects exceeding 750 million dinrs in 1983 prices (from April 198K). Beginning in June 198K these reports will be issued on a quarterly basis. These reports will be provided to the Bank for discussion. Submission of the first such reporc to the Bank is a condition of the second tranche release. Program Developmenr For Large Proiects (b) Reprograming of Individual At the project level individual The Yugoslav authorities have prepared a project list Investments to Ioprove quality tepublice and provinces have of ongoing projects exceeding 750 million dinars in of Ongoing Investment Program. been reexamining their value (about 502 of investment program) for inclusion investment program to reassess in the monitoring system described sbove. As a the desirability of individual condition of second tranche release, rhe authorities investments. However, there is will define a program of priority investment projects no federal level agreement on in the energy sector for the period 1983-85, required the rephasing of major projects, to achieve planned targets (the core investment program in energy). Program Development (c) Improving Project Selection New legislation imposes stricter The institutional mechanism for evaluating projects is and Coordination controls on the sources of to be strengthened. Chambers of Economy, banks and financing that must be secured other signatories vill agree on minim uniform prior to initiation of investment criteria, including minimum economic rates investment. including mandatory of return (differing by sector). calculated according minimum self-financing by the to the Bank methodology, for projects in the economic investors on a sliding scale. sectors through a special Social Compact on Uniform which varies by purpose of Investment Criteria to be passed by June 1983. The investment. Since Februsry 1983 Compact will establish inter-ageny groups, attached new investment proposals must be to the Chambers of Economy, to "give opinions' on registered with regional or proposed projects taking into account agreed federal Chmbers of Economy criteria. Conclusion of the compact vill be a (depending on project size) to condition of second tranche release. By December enable other enterprises to 1983. Federal and regional Chambers of Economy and comn_t on desirability of banks vill prepare personnel and training recruitment project. Yugoslav Banks programs to provide necessary staff capacity for Association CYBA) has developed improving investment review procedures with a view to a now manual for project having sufficient trained staff in place to fully evaluation (largely based on implement these investment review procedu es by Bank materials). December 1984. - 28 - Table 1: STRUCTURAL ADJDSUET LOa pROGRAM Structural Adjustment Progr_a Sector and Policy Issues Actions Already Taken Steps to be Taken 1. INVESTh POLICY AID RESOURCE ALLOICTION (continued) (d) Indwtrial Restructuring Studiea for reatructuring of selected industrial subsectors are to be initiated with the World Bank. The modalities of the studies woqld be discussed in September 1983 with the Bank. (e) Investment incentives Interest rates on long term If inflation rate exceeds 202 during the first half of deposits have been incresed by 19P3 the Government will review interest rste levels between 10 and 18 percent in the with the DIF with a view to introducing further upward past 12 months to a range of adjustments during 1983. 13-Z8 percent. thus significantly raising the cost Agreement to reach positive rates for intermediated of funds co borrowers of bank funds by gradual incresses in minima lending rates to resources, achieve positive lending levels for non-economir activites by beginning of 1986 and for economic activities with certain exceptions by the beginning of 1987. Exceptions for (s) export credits. (b) short text credits of the National Bank of Yugoslavia for agriculture, (c) credits for primary agricultura l production nd (d) investment credits for priority activities in the revised 5 year plan, te) special funds for less developed regions. During 1983-85 the value of (c). (d) and (e) vill be limited to 25 percent of the total annual investment. From 1986 more favorable rates on investment credits cen be applied to only 25S of total investment credits of doesetic banks. For item (c) and (d) positive interest rates by the beginning of 1989. Action Additional legislation will be introduced by December 1983 to stimulate foreign investment. Action (f) Improving Financial Planning Discussions between the YBA and Under the present Law on Planning banks prepare Bank staff were initiated during investment plans on basis of constant prices. preparation of Induatrial Credit Inflationary movements are not adequately accounted VI project. for leading to unrealistic planning, and frequent underfinancing of specific investment projects. By the end of 1983 the necessary methodology will be developed to enable the banks to make their financial and operational projections at current prices. starting in 1984. Progress in this area will be a condition for releasing the second tranche. Starting at the end of 1983 the Federal Planning Institute, with the assistance of other competent federal bodies, will provide assumptions on future inflation and exchange rate movements for use by financial institutions in their financial and operational planning. Action Improvements of the financial base and accountability of banks are needed. Under the Credit and Banking law of 1978, banks are required to maintain a Joint Liability Fund (JLF) which can be used to write off bad debts. The JLF must be not less then 3S of the banks' total investments at the end of the preceding year. Tne same law requires that the banks should create a Reserve Fund to maintain their liquidity. The Fund should be increased to 32 of total investment, by investing out of the banks' net income a aun equivalent co a minimum of 0.32 of their total investoents. A number of Yugoslav banks are currently in breech of both requirements. Steps will be taken for all banks to fully meet these requirements in a phased fasbion over a period of several years (6 years in the case of the JLF). In addition, the provision of the 1983 Annual Plan Resolution which requires the banks not to use morc than 202 of their short-texr resources for long-term loans will be maintained. - 29 - Table 1: STRUCTURAL ADJUSThT WAN PROGRAM Structural Adjustent Program Sector and Policy Issues Actions Alrdy Taken Steps to bc Taken 1I. FOREIG EXCHANGE ALLOCATION AND EXTERNAL TRADE 1 General Action (C) Exchange Rate A gradual depreciation of diner The Government intends to enoure continued during 1982. together with step competitiveness of the Yugoslev economy through a devaluation of 202 in October program of continuou- exchange rate adjustments. 1982 produced 122 (year on year) real devaluation in 1982. Program Development (b) Foreign Exchange Allocation The 1978 Law on Foreign Exchange A monitoring group bas been establiahed by the Federal Operations and Foreign Credit authorities to assess the effects of the new Relations was substantially arrangements. The group's term of reference have amended in Dece ber 1982 with a been agreed with the Bank. The group will report to view to promoting interregional the Federal Executive Council (FEC) by September foreign exchange mobility. 1983. The report would be available for discussion However, the likely effects of with the Bank and the DI, ed will include a program the new law are as yet difficult of activities to improve foreign exchange obility by to gauge, given its recent undertaking necessary measures for reactivating the implementation. domestic foreign exchange market and more liberal procedures for stimulating organizations with surplus foreign exchange to sell it to deficit organizations. Following these discussions the modalities for implementing revised procedures resulting from the report will be decided. Submission of the report to the Bank will be a condition of release of the second tranche. Action (c) Monitoring of Foreign The National Bank of Yugoslavia NIY vill take necessary measures (including provision Borrowing and Debt (NBY) has been engaged for some of staff and financial measures) to ensure that the Informtion time in a program to computerize conputerized system of debt reporting is fully its debt reporting system; it operational and capable of providing analytically has also worked closely with the unable information by the end of 1983. By July 1. IN? and the conerciel banks to 1933, the Dank will agree vith the NBY on reporting improve the quslity of the data formts and a timtable that will provide a suitable on Yugoslavia's current debt test of the system while providing information of use situation, to the Yugoslav authorities and ths Bank. 2. ncport Incentives Action (a) Access to Ioports Law introduced in October 1982 A permnent revolving "Export Development Fund" (EDF) giving priority in foreign will be established with SAL funds to provide imports exchange allocation to exporters to exporting enterprises. Creation of the EDF will be with signed export contracts. a condition of loan effectiven.zs. In addition to the proceeds of the SAL the EDF slhall be enlarged with foreign exchange permnently 1.urchased from exporters that have benefited from EDF resources. The EDF will be further augmented in 1984 and 1985. Action (b) Increasing Yugoslav Export Tugoslav Bank for International The YBIEC has prepared projections of its resource Credits Economic Cooperation (YBIEC) need. to meet the demnd for refinancing media end established 1980. long term export credit up to 1985. The necessary finacial resources will be made available by the banka, the NBY and other appropriate sources in the annual Plan Resolution for 1984 and 1985. An action plan vill be prepared by October 1983 to strengthen YDIEC's institutional capability, particulsrly in the area of market information for capital goods and engineering exports. Necessary institutionsl and staffing changes will be implemented by September 1984. Program Development ic) Export Marketing A working group has been established to prepere by no later than Merch 1984 an action plan to strengthen Yugoslavia's export marketing arrangements. The plan will be reviewed and discussed with the World Bank in March 1984. Necessary institutional and staffing changes will be completed by the end of 19B4. - 30 Table I S7WCLURAL ADJUSThRUT LOAN PROGRAM Structural Adjustment Progr_ sector and Policy lomms Actions Already Taken Steps to be Taken FRIG0 DCWAE ALLOCATION AID STRRAL TRADE (continued) Action (d) Strenghtening Export During the past two year. the The export incentive system will be revised to Inentives Federal Comnity of Interest encourage the expanion of efficient export activities for Foreign Economic Relations in terms of domentic coat, and to reflect the (CIlE). the Federal Secretariat principles of uniformity and utomaticity. With the for Foreign Trede and the real exchange rate becoming the main incentive to Federal Secreteriat for Finance economic export. Direct export subaidies (granted by bave conducted a review of the the republics and provinces) will be gradually phased varioum export incentives, out. Fiscal incentives (such as direct and indirect tax exemptions) will be the same for all industrial branhes and related to: export value added (net foreign exchange earninge); and export performance (minimKas ratio of eKport to output). This will encourage export specialization and export. with high net foreign exchange earnings. Duty free access to isported imports for exporters sill be provided whenever justified by the level of net foreign exchange earnings. Proposals for revision in the export incentive system vill be reviewed by the Dank in lovember 1983. Vev export incentives will be introduced in the 19t4 annual plan resolution. Program Developmeot 3. Import Liberalization Since 1977 there has been a Preparation of program for phased import significant reduction in the liberalization pri passu with liberalization of share of imports subjeCt to foreign exchange alloe tion. Government to prepare quatative restrictions and program proposals by September 1983 for implementation quotas requiring approval of the in 1984 and 1985 with a view to limiting the value of Federal Secretariat for Foreign Ceoodities subject to quantitative restriction to a Trade. Between 1977 and 1982 maximum of 201 of total imports (excluding oil the proportion of non-oil imports). imports subject to quantitative restrictions declined from 422 Study to 291 of total imports. However, the impct of this The Yugoslaw authorities will prepare a study of liberalization has been negated effective protection showing the effect of trade and by de facto restrictions on use payments restrictions on the domestic price structure of foreign exchange. (for completion by April 1985). Terms of referene for this study have been agreed with the bank. The results of the study will be used to shape coemercisl policy for the 1986-90 period. III. P1ICR POLICY Action Under a temporary price control Under the Social Compact on Price Policy for 1983, the law passed in July 1982 price number of coemodities subject to price ceilings is ceilings were introduced on all being progressively reduced. Long-term price policies ceodities except for produce are being prepared in the energy, ferrous mad mold in farmers markets Until nonferrous metallurgy bsic chemicals, agricult-r January 1983 the authority for forescry and rail tranaport sectors to be finalized by granting price increases has September 1983. By September 1983 Federal Assembly is rested sith the FEC. expected to adopt the Law amending the 1980 Law on the Thereafter. the eutbority for Price System to: .i) substantially increase the role granting price increases for of world prices and mrker forces and Cii) reduce the Aoms products has been number of coiodities subject to the review of the tranfered to Counities for COIt for Prices. In May 1983 the FEC freed a Interest (Cot for Prices at substantial share of industrial products from its the Federal, Republican and direct control. Only a limited number of defined Provincial lsvel. However. ceodities (e.g. petroleum And petroleum derivative) inflation has not moderated are now subject to direct federal control. The aignificantly aince the intention over the medium-tern is to continue to introduction of these new increase the proportion of comodities where prices meaures nd progress in are set independently by Organizations of Asoeciated reducing distortions between the labor COALs) and are subject only to regintretion relative price structure in with the COla for Prices. This intention vill be Yugoslavia and world prices hba reflected in proposals to be made in the last quarter been disappointing. In January of 1983 and 1984 regarding price policy in the 1983 a Social Compct on Price forthcoming year. Provisions have also been made for Policy for 1983 we signed, ad an exchange of views between the Rnk and the Yugoalav in February the price ceilings authorities on the progress of price liberalization in on some key c_odities- the last quarter of each year. A timetable will be including electricity, oil agreed by September 1983 for further liberalization in products, railway 1984 and 1985 such that by December 1985 only a trenaportation, rents and ome liited number of defined ceodities of special food items were raised by an social significance will be subject to the reviev of average of about 25X. the COIt for Prices. (a) Agriculture. Purchase prices of major co_modittes subject to federal regulation are generally above world prices and relative prices are broadly in line with world prices. Prices are normally set in September for the coming year end will take into account world prices snd projected exchange rate changes. -31 - Table h. STRIIItAL AWusrnTgr LOU PROCRAM Structural Adjustment Progrum Sector and Policy Isaue Actions Already Taken Step. to be Taken PRICE POLICY (continued) () EnergyS Prices of domestic and imported crude oil are currently at parity and petroleum products ere aubetantially above world prices. This price structure will be at leasc maintained in real terms by adjusting prices periodically to world market trends, the diner exchange rate and domestic inflation. The prices of the products 'ill be reviewed at least twice a year to determine whether adjustments are required in the light of these factors. In the case of natural gas, the internal price of domestic gas is aignificantly below that of imported gas. Price. of domeatic gas 'ill be increaaed to achieve parity with the imported price by January 1987. Towards reaching this objective the first major adjustment vas made in May 1983. Further annual rcal adjuatments, in the prices of domestic gau 'ill be implemented in conformity with the long-term price policy, after exchange of views with the World Bank. In the case of lignite, coal and electricity the intention is to forutlate a long-term policy for achieving parity with economic prices over a period of 4 to 5 years. Detailed terms of reference have been agreed between the Dank and the Yugoslav authoritiea on a atudy aimd at setting a pricing methodology for coal, lignite and electricity. The study will be initiated in September 1983 and completed by end 1983. The results of the study and the reconmended pricing measures would be discussed and reviewed with the Dank in January 1984. Further, in the case of electricity tariffs, the average tariff 'ill be moved toward parity with the long-term marginal cost of supply over a 4-5 year period (implying, on average, a 100 percent increase in real term.). Towards reaching chis objective prices will be increased by 15Z in real terms (over the increase of producer prices during April-December 1983) in January 1984. Further annual real adjustments in tariffs will be implemented in subsequent yea.s, whose level would be annually agreed with the World Bank prior to the increases being put into effecc. (c) Tranaport Railway tariffs will be increased in real terms each year so that compensation payments to Railway Transport Organizations are eliminated, with minor exceptions, by the end of 1990. Towards this objective railway tariffs are to be increased in January 1984 by at least OZ in real terma (over the increase of producer prices during: uary-December 1983). From 1985 to 1989, railway t -iffs will be increased by at least 6: in real terms every January to ensure that compensation payments dec.ine over the previous year, after an exchange of view vith the Bank. Road user charges will be adjusted in line vith inflation, to provide adequate funds for road investment and maintenance. The Council for Republican and Provincial Self-Kanaging Comunities of Interest for Roads will prepare, by September 1983, a study defining a program of road maintenance and rehabilitation requirementc. IV. FINANCiAL DISCIPLINE Action Law on Rehabilitation and The following legislative measures are to be passed by Diasolution of Organizations of June 1983: i) amendments to the Bankruptcy Law which Associated Labor of 1980 will strengthen the role of external creditors in the ('Bankruptcy Law') establishes design, execution and monitoring of rehabilitation automtic timetable for closing programs which vill give the SDK the right of loss-taking enterprises which initiation of bankruptcy procedures; (ii) amendments cannot arrange financial support to the Law on Payments of 1975 designed to restrict programs. Law on Social inter-enterprise credits *rising from trading Accounting Service (SDI) operations outside the banking syatem. modified to enable it to enforce Inter-enterprise credit not covered by inatruments of incomes policy, payment will be reduced by 50 billion dinars in 1983 as compred vith 1982; (iii) a new law preventing investment in enterprisea vith insufficient working capital will be passed. - 32 - Table 1: STRUCTURAL ADJUSThENT LOAN PR0GRAM Structural Adjustment Progra Sector and Policy Issues Actions Already Taken Steps to be Tken FINANCIAL DISCIPLINE (continued) Program Development Establishment of control mechanism to limit aggregate value of payments from comoon reserve funds of sociopolitical communities and COla to cover operating costs in loss making enterprises. Government will prepare by December 1963 a progrm to monitor and maintain scope of such interventions at their nominal level in 1983 in 1984 and 1985. This would imply a significant decrease in the value of such interventions in real terms. V. SECTOR POLICIES Studies/Program Development (a) Energy Conservation National Program for Energy Conservation has been passed; The Federal Cocittee for Energy and Industry vill be program defines guidelines which responsible for preparing a program of energy are to be included in social conservation studies of enterprises which shall have compacts and self-management been selected in consultaton with the Bank, which may agreements on energy be financed in part by a *15 million Bank loan. conservation, substitution, Agreement with the Bank on the term of reference for rationalization and these studies will be a condition of release of the consumption. Measures have been second tranche. Taese studies are expected to be taken to convert factory and initiated by September, and would take no more than home heating from oil to twelve months to complete. domestic coal; electric power for domestic use is being rationed and petrol ration coupons have been introduced for passenger vehicles. Bank mossions have visited Yugoslavia to exmine energy use patterns in steel, cement, and refining subeectors. Progrr, Development (b) Agricultpral Investment A study of Agricultural Action programs for each branch of agroindustry vill Processing Industry focussing on be prepared by November 1983 and discussed with the problems of excess capacity was Bank. The results of these studies and programs would submitted to Bank in December be used for adoption in and implementation of the 1984 1982. and 1985 Annual Plan Resolutions. Studies (c) Agricultural Production Yugoslav authorities have agreed Completion of Primary Production Study, December 1983. to terms of reference of a joint study with the Bank of Primary Program Development Agricultural Production. Bank financed regional development Yugoslav authorities will begin phased implementation projectr aimed at strengthening of recommendations of Primary Production Study by cooperation between social and March 1984. Measures will include (i) improved individual sectors are under marketing arrangements, tii) better access for preparation. individual sector producera to agricultural inputs, (iii) increased availability of financing for on-farm investments. (iv) improvements in applied research and extension arrangements, (v) increases in regional budget and allocations for promoting individual sector development, (vi) measures to accelerate land consolidation activities. - 33 - Table 2: PROJECTIONS OF SELECTED ECONOMIC INDICATORS UNDER ALTERNATIVE ASSUMPTIONS 1983-1985 1986-1990 1980-82 Without With Without With (Esti- Structural Structural Structural Structural mates) Adjustment Adjustment Adjustment Adjustment Annual Growth Rates (Z) GDP at market prices 0.6 -0.5 1.0 2.0 4.2 Industrial Production -0.1 -0.6 1.7 2.5 5.9 Exports Goods and Non- factor Services (GNFS) 1.5 2.3 4.3 3.9 6.7 Convertible Currency Lerchandise Exports -2.9 3.0 6.6 3.5 7.0 Imports of GNFS -6.8 2.0 4.8 2.5 6.5 Gross Investment -3.6 -2.5 0.4 2.5 4.1 Ratios 1982 1985 1990 Investment (2 GDP) 31.2 27.3 29.0 28.5 28.9 Balance on Current Account (2 GDP) -0.6 0.2 0.1 0 0.5 Merchandise Exports (X Imports) 70.2 82.8 86.0 88.5 82.2 Deb: Service Ratio (% Exports of Goods and Services) 19.3 19.5 18.8 10.6 12.2 Debt Service Ratio (Convertible Currency Area) 26.2 26.4 24.7 16.8 17.3 61. Table 2 illustrates the expected evolution of certain key macroeconomic aggregates over the rest of the decade under alternative scenarios. The analysis is grouped into two sub-periods, 1983-85 and 1986-90. These intervals correspond to the remainder of the present five-year plan period and the next five-year plan period. They also, however, reflect the probable phasing of the economy's transition from a period of restrained domestic demand and slow growth to a situation where a sustained export recovery permits a return to more dynamic growth, assuming successful implementation of a structural adjustment program. 62. Two scenarios are portrayed here. Under the "with structural adjustment" ecenario, the volume of exports to the convertible currency area is expected to recover markedly in the 1983-85 period as the recovery in the world economy gathers momentum, export competitiveness improves and - 34 - the structure of incentives in the economy rewards efficient exporters more consistently and effectively. Given the current outlook for sluggish growth ot world trade, an increase in convertible currency exports between 6% and 7% in real terms would imply a modest increase in Yugoslavia's share of such trade. While this will not be easy, it is a reasonable forecast given Yugoslavia's diversified export structure and the improving incentive framework that exporters are expected to face. This improvement in export performance, when accompanied by other policy measures in the adjustment program designed to improve the efficiency of the economy, can be expected to result in more favorable access to the international capital markets than it currently enjoys. The projections (which are further elaborated in Annex I) envisage gross capital inflows averaging $3.3 billion between 1983 and 1985; nowever, availability is projected to be somewhat lower in 1984 and 1985 than in 1983 given the exceptional efforts that are being made in this year. These amounts are reasonable given the assumption of a continued standby relationship with the IMF and relatively low growth in overall indebtedness. This outlook for current and capital inflows enables Yugoslavia to resume growth in imports and thereby output. The alternative scenario, "without structural adjustment," projects the consequences of a lower export growth to the convertible currency area, resulting from a policy framework which does not provide the appropriate stimulus to exports. ln this case, the share of Yugoslavia's exports in world trade would continue to decline. This would affect the country's access to the international capital markets and thereby slow the growth of imports and output. 63. Over the longer-term the structural adjustment program can be expected to lead to a continued improvement in Yugoslavia's exports as well as in overall growth performance. Yugoslavia would then enter a virtuous circle whereby faster export growth would help to pay for cdditional imports and to improve Yugoslavia's access to external .inance. This in turn would enable Yugoslavia to liberalize its imports, to scale back the degree of protection of the economy, improve efficiency, and return to a faster growth path. Without such a program Yugoslavia would continue to face severe foreign exchange constraints. Slower export growth would oblige Yugoslavia to limit its imports, thereby increasig the degree of protection in the economy and placing a brake on the rate of growth of real output. Such a situation would also be expected to redtLe Yugoslavia's access to external finance and to discourage the flow of workers' remittances (which are also vulnerable to confidence factors). However, such a scenerio is not considered likely given the economic measures which have already been introduced and the Government's commitment to implementing the policy measures outlined in the Letter of Development Policy. 64. Under both scenarios Yugoslavia's debt-service ratio is projected to decline markedly over the course of the decade. In the "without structural adjustment" case this is due to the fact that Yugoslavia's aggregate debt level would not rise significantly, so that over time debt - 35 - service payments would decline in relation to export receipts. In the 'with structural adjustment" case Yugoslavia's borrowing requirements are also expected to remain modest, as the current account position is forecast to remain approximately in balance during the rest of the decade. However, both ratios are expressed in relation to total export earnings. Given the importance of non-convertible currency exports in the structure of Yugoslavia's merchandise trade (with such exports accounting for 43 percent of merchandise exports and 22 percent of total exports of goods and services in 1982) the debt service ratio in convertible currency terms would remain significantly higher. Accordingly by 1990 the convertible currency debt service ratios would be approximately 50 percent higher than the total debt service ratios shown in Table 2. Part III - THE STRUCTURAL ADJUSTMENT LOAN A. Loan History 65. Over the last several years there has been an intensive policy cialogue between the Yugoslav authorities and the Bank. These have been based on a series of economic reports leading up to and including the most recent report, Yugoslavia: Adjustment Policies and Development Perspectives (No. 3954-YU, dated November 2, 1982). With the emergence of lugoslavia's economic difficulties in the wake of the oil price increase of 1979180 and the attendant repercussions in the world economy, the Bank strongly supported the intention of the authorities to refocus their economic strategy and policy framework to address the structural adjustment issues facing the e._-omy, as described in Part II of this report. As the country's economic difficulties intensified, the Yugoslavs introduced a series of economic measures to stabilize the economy and sought the support of the IMF as described below. 66. As the work of the Stabilization Commission progressed, it became increasingly evident to the Yugoslav leadership that substantial changes in the medium-term policy framework were need"d, over a wide range of areas, in order to achieve a durable adjustment patn. It also became clear in the second half of 1982 that the liquidity problems facing Yugoslavia in 1983 and 1984 would require a coordinated approach between the IMF, concernee governments, the Bank for International Settlements, the commercial banks and the Bank, so as to strengthen the country's capital account position. At the ena of December 1982, the Government requested the Bank to give urgent consideration to a structural adjustment loan to Yugoslavia in support of its adjustment efforts. Bank representatives were also invited to attend meetings of an intergovernmental group held under Swiss Government auspices in Berne, Switzerland and of commercial banks in Zurich under IME auspices to discuss the program of financial assistance to lugoslavia (see para. 15). The Bank mounted an exploratory SAL mission to Yugoslavia in January 19E3. Given the close dialogue between the Bank and the authorities in recent years on issues of structural adjustment, it proved possible to define the broad areas of policy action relatively - 36 - quickly. To facilitate discussion with the Bank a Steering Group was established under the chairmanship of the Deputy Federal Secretary of Finance, with representatives of a number of Federal agencies and other bodies. An appraisal mission visited Yugoslavia in February/March 1983 and a post-appraisal mission took place in April. Negotiations were held in Washington from May 9 to 14, 19b3. The Government delegation was headed by Dr. D. Grupkovic, Deputy Federal Secretary for Finance; the UBB delegation was headed by Dr. H. Zecevic, Executive Vice President. B. IMF Activities in Yugoslavia and Relationship to the Proposed Loan 67. Over the past three years Yugoslavia has made extensive use of the resources of the IhF. In June 1980 the Board of Directors of the IMF approved a two-year standby arrangement for an amount equivalent to SDR 339 million. On January 30, 1981 this arrangement was replaced with a three-year standby arrangement for an amoun. equivalent to SDR 1,662 million or 400% of quota, financed from ordinary resources and the supplementary financing facility. As of January 31, 1983 Yugoslavia's drawings under the standby amounted to SDR 1,108 million. The IDF program has focused on the stabilization measures necessary to address Yugoslavia's balance of payments problems with the convertible currency area. The performance criteria attached to the first two years of the standby agreement included ceilings on the total level of domestic credit extended by the banking system; bank credit extended to the budget of the Federation and the increase in the outstanding amount of debt in convertible currency. In addition, exchange rate and interest rate policies have been under continuous review between the IMF and the Yugoslav authorities, and there has been considerable activity in these policy areas. The Letter of Intent covering the third year of the standby program indicates the Government's policy intentions in the areas of monetary policy, fiscal policy, exchange rates, interest rates, selected prices and personal incomes; performance criteria have been established which monitor exchange rate developments, interest rates, growth in net domestic assets of the banking system, growth in credit by the National Bank of Yugoslavia to the Federal budget, growth in external debt, and limits on public expenditure. In addition, the agreements with the Fund provide for a review of policies and developments in the first half of the year, not later than August 15, 1983, at which time performance criteria will be established for the second half of 1983. ble 3 provides a sunmary of the principal understandings reached bet hee e Government of Yugoslavia and the IMF. 68. There has been an extensive exchange of information and regular consultation between the Bank and the IMP during the preparation of the programs for the standby arrangement and for the proposed structural adjustment loan, as well as in the context of the intergovernmental and commercial bank meetings held in Switzerland earlier this year. Bank staff members participated in the review mission for both the first and second years of the standby arrangement, and an IMF staff member participated in the economic mission which led to the Bank's recent economic report Yugoslavia: Adjustment Policies and Development Perspectives. - 37 - Table 3: UNDERSTANDINGS REACHED BETIWEEN THE GOVER*MENI OF YUGOSLAVIA AND THE IMF. Exchage Rate Policy: During 1983 the exchange rate will be adjusted steadily to provide a continuing incentive for exporters. lnterest Rate Policy: Incres!es in qeposit interest rates of between 4-8% were introduced in February. As a result the cost of funds to the banking system will be increased by about 53 billion dinars or about 2.5Z in 1983. If inflation in the first half of the year exceeds an 20% annualised rate, interest rates will be further reviewed with the IMF at the time of the mid-year review. Credit Policy: Quarterly ceilings on the level of net domestic assets of the commercial banking system will be limited to an 8% annual rate of increase in the first half of 1982. Ceilings for the second half of 1982 will be determined in the course of the mid-year review. In addition, there will be no credit from the National Bank of Yugoslavia to the budget of Federation in 1983. Fiscal Policy: Public sector expenditure will be limited to a twelve monthly rate of increase of 13%, and expenditures for collective consumption to 182. If monthly data show that revenue collections for the public sector exceed 182, tax rates will be reduced and excess revenues sterilized in blocked accounts in subsequent months. External Borrowing: During 1983 the contracting of new loans with maturities of between one and ten years will be limited to a maximum of tl.5 billion of which no more than $500 million will be loans of maturities between one year and three years. The limits exclude borrowing of the National Bank of Yugoslavia and outstanding debt that falls due in 1983 and that is rolled over. - 38 - 69. The Bank has devoted a considerable portion of its economic work to issues of in'-estment policy and the foreign trade and payments regime, particularly in the period following the 1979 oil price shock. The Government i! encouraging the Bank to continue with these efforts. Under the Third Agricultural Credit Project (Ln. 1477-YU), for example, the Bank commissioned in 1980 a substantial study of interest rate policy. In the context of the proposed structural adjustment loan (SAL) the Bank will actively monitor and review the actions, the program development activities and the studies described in the Government's Letter of Development Policy (see Annex IV). Bank staff members are also working closely with research institutes and the planning authorities in Yugoslavia in transferring and further developing a CGE model which was used in the preparation of the most recent economic report on Yugoslavia (see para. 33). The purpose of the model is to analyze the impact of Government policies on resource allocation and the pattern of incentives facing export and import substituting sectors in a medium term planning framework. This analysis will continue to be used in addressing issues of medium-term structural change in the economic development of Yugoslavia. 70. The policies and actions indicated in the Government's Letter of Development Policy are fully consistent with and complement the policy actions being monitored by the IMF under the standby arrangement, with the Fund concentrating more on the immediate need to resolve external liquidity problems through demand management, exchange rate and external financing actions, and the Bank concerning itself with the medium-term framework that is emerging through the work of the Stabilization Commission and the revisions of the five-year plan. The main areas of common interest between the Bank and the Fund are in the areas of interest rate policy, foreign exchange allocation, external debt monitoring, and price policy. In these areas the institutions have complementary interests and the capacity to assist the authorities in the formulation of policy. With regard to interest rate policy the TIF arrangement includes an undertaking by the Yugoslav Government to review the level of interest rates with the IRF if the annualised rate of inflation exceeds 20X in the first half of 1983. It also provides for a steady adjustment in the exchange rate during 1983 to encourage exports. These measures are reinforced by understandings under the SAL covering minimum lending rates and the creation of an EDF to finance imports for exporting enterprises. In addition, the SAL addresses medium-term policy issues in these areas. The SAL also includes a substantial institution building component to strengthen the design and monitoring of investment projects and a phased program for improving the efficiency of the foreign trade and payments regime. In the area of price policy, the IMF and the Bank are in general agreement on the direction of price liberalization, and on the shifts in the structure of relative prices thsat are needed to encourage efficient resource allocation. Increases in the prices of electricity, coal, live animals and meat, and railway fares were implemented by the Government in January and February 1983, in consultation with the ISF. These increases are consistent with Bank positions on these topics and are reinforced by the medium-term pricing - 39 - framework agreed to under the SAL on energy, transport and agricultural pricing. C. Benefits and Risks 71. Benefits. The main benefits of the proposed loan flow from the policy adjustments described above, which are expected to lead to improvements in investment efficiency and the balance of payments situation (see paras. 60-62). Various understandings reached with the Government are designed to ensure significant institutional and policy changes in important areas such as investment planning and resource allocation, foreign exchange allocation, foreign trade policy, price policies and enterprise decision-making and some selected areas in the energy and agricultural sectors. The SAL coincides with a wider effort to provide financial assistance to Yugoslavia in overcoming its current international liquidity difficulties. The ability of the Yugoslav authorities to reach agreement with the Bank on a program of structural adjustment is regarded by the international capital markets as an important affirmation of Yugoslavia's commitment to addressing the medium-term problems facing its economy. Private commercial banks have indicated to the Bank that the prospect of a first SAL has been an important factor in their decision to proviae continued financial support to Yugoslavia. The loan will help assist Yugoslavia in meeting its financing needs through quick disbursing funds. The EDF to be created will be of direct support to Yugoslavia's export drive. 72. Risks. The Government's structural adjustment program has two major risks. The first risk is that the expected improvement in the current account of the balance of payments, on the basis of which the overall financial package to Yugoslavia has been based, will not materialize. This relates partly to the uncertainties regarding the international environment, particularly as regards the rate of growth of world trade (which could affect Yugoslavia's export performance), international interest rates and the price of imported energy ard partly to the speed with which the Yugoslav Government implements the required changes in the foreign trade and exchange system. The second risk is that the rest of the program of economic reforms is not fully implemented or does not lead to desired behavioral changes as quickly as needed or that the program development process does not lead to the development of satisfactory policy reform in the future. 73. Yugoslavia's balance of payments position is undoubtedly vulnerable to unanticipated changes in trade and payments flows, particularly given its low level of international reserves (see para. 15). This reserve position means that the authorities have only a limited cushion against unforeseen developments. The immediate outlook for the economy is predicated on the assumption that Yugoslavia will record a surplus on current account during the second half of 1983. This goal is attainable even with some setbacks in the pace of world economic recovery. - 40 - It will, however, require a recovery in merchandise export performance to the convertible currency area and also that invisible receipts (particularly as regards tourism and workers' remittances) do not deteriorate in comparison with 1982. While the merchandise export target will not be easily attained, it is, nevertheless, feasible provided that the essential imports reach exporters. The aim of the EDF is to assist in this process. The assumption on invisibles is conservative, but prudent given the past volatility of these flows. While Yugoslavia's liquidity position is likely to remain extremely tight in 1983, on balance the external resources being made available to the economy provide sufficient room for Yugoslavia to begin implementing its medium-term adjustment program effectively. The risk that Yugoslavia will not fully implement this program is not considered particularly significant. However, given the federal structure of Yugoslavia and the necessity to get approval of a large number of parties, implementation of the adjustment program may be slowed down. Nevertheless, the work of the Stabilization Commission has created a climate of support for the Government's adjustment strategy at all levels of decisionmaking. The consensual nature of decision making, while slow, leads to widespread commitment once decisions are made. There is a serious commitment in the Yugoslav Government to implement gradually over time a process of policy reform that will permit efficient use of the more limited investment resources presently available compared to the past. D. Loan Amount 74. The proposed loan of $275 million (including capitalized front end fee) represents about 53% of the Bank's lending program for Yugoslavia this fiscal year and appears appropriate in view of the breadth and quality of the SAL program and the country's immediate and urgent need for quick disbursing funds. Moreover, in view of the substantial international financial package of nearly $6.5 billion that has been put together (see para. 15), the proposed loan represents a relatively modest, though crucial, Bank contribution. E. The Borrower 75. The Government, with the concurrence of the YBA, has designated Udruzena Beogradska Banka (UBB), the largest banking group in Yugoslavia, as the borrower of the proposed loan. The Socialist Federal Republic of Yugoslavia would guarantee the loan. UBB is an associated bank comprising 20 basic banks in the Socialist Republic or Serbia representing about 4,300 working organizations with over 10,000 BOALs. All 20 member banks have mutual unlimited subsidiary liability for UBB's obligations. UBB performs a wide range of services, mainly in the field of foreign borrowing and exchange transactions and project financing. It is the borrower under the Serbia Regional Development Project (President's Report No. P-3477-YU, dated March 10, 1983) which has been approved by the Executive Directors on June 9, 1983. - 41 - F. Monitoring 76. The SAL will be disbursed in two tranches of $175 million and $100 million respectively. The first tranche would be available upon loan effectiveness. The second tranche would begin disbursing subject to the Bank being satisfied, after an exchange of views with the Government to take place about October 1983, with the progress made in the execution of the Government's adjustment program, including, inter alia, the following specific actions; (i) submission to the Bank of a first semi-annual report on past investment expenditures (para. 24); (ii) definition of a program of priority investment projects in the energy sector for the period 1983-85, required to achieve planned targets (para. 24); (iii) conclusion of a Social Compact on the Criteria for, and Evaluation of, the Socio-economic Justification of Proposed Investments (para. 26); (iv) adequacy of progress in finalizing (a) the revised 1981-85 five year development plan, including a definition of sectoral and subsectoral priorities (para. 24), and (b) the improvement of financial planning procedures in commercial banks (para. 30); 5v) adequacy of progress in monetary the operation of the system on foreign exchange allocation and in the formulation of a program aiming at an increase of foreign exchange mobility (para 34); and (vi) adequacy of progress in the carrying out of energy conservation studies for enterprises which have been selected in consultation with the Bank (para. 57) (Schedule to the draft Guarantee Agreement). 77. The review of implementation of the structural adjustment program will, of course, include all other aspects of the program. In this context, the Government agreed that it will regularly exchange views with the Bank on progress achieved under SAL; as part of these exchanges the Government will furnish to the Bank information on the progress achieved in carrying out the program for structural adjustment program (Section 3.03 of the draft Guarantee Agreement). Finally, the preparation of a second SAL would require extensive discussions with the Government, and would be based on the successful implementation of the program specified under this SAL. G. Export Development Fund, Loan Administration 78. An Export Development Fund (EDF), located within UBB, will be established to promote the development of Yugoslav exports. The - 42 - establishment of EDF would be a condition of loan effectiveness (Section 6.01(b) of draft Loan Agreement). The institutional setting, policies and procedures of the EDF have been agreed with the Government and UBB (see Annex V and Schedule 5 to the draft Loan Agreement). The EDF is to be a revolving foreign exchange fund for the purpose of providing foreign exchange to meet the recurrent direct and indirect import requirements (for raw materials, intermediate goods and spare parts and components for elegible exporters of turn-key industrial projects, civil works, ships and capital goods whose exports are covered by export credits refinanced by YBIEC). UBB would onlend the loan proceeds to eligible exporters on terms and conditions satisfactory to the Bank. Criteria for determining eligibility for use of EDF resources are outlined in Annex V. EDF will be administered by UBB which agreed to establish a separate organizational unit with staff in numbers and experience satisfactory to the Bank. Approvals of EDF loans would be made by a Credit committee composed of five members: one representing UBB, and two each representing the Federal Chamber of Economy and YBA. Sub-borrowers will apply to EDF through their own authorized bank (basic or associated bank, as the case may be) which will make a preliminary analysis of the application and transmit it to the UBB unit (through YBIEC in the case of exports covered by YBIEC export credit refinancing) with its recommendation. Sub-loans will be guaranteed by the authorized banks of the sub-borrowers. The UBB unit will review applications particularly with respect to the creditworthiness and financial standing of the applicant, justification and commercial viability of its export plans/quality of export orders, technical and managerial capability to achieve export targets, and justification of import needs and production cycle. Sub-loan applications shall be reviewed by the sub-borrowers' authorized banks and by the UBB unit or YBIEC will be carried out within a period of no more than 5 working days each. Sub-loans will be formally approved, or rejected, by the credit committee of the EDF, based on the recommendations of the unit or YBIEC. The UBB unit will administer sub-loan disbursements and repayments, the Bank loan disbursements and servicing and will be responsible for regular progress reports to the Bank and audit of EDF by the Social Accounting Service (SDK) or auditors acceptable to the Bank. Sub-loan disbursements will be made directly to foreign suppliers by UBB based on appropriate supporting documentation. 79. Sub-loan maturities will normally reflect the production cycle and the period for receiving actual export revenues. They will not exceed six months for exports of consumer goods and intermediate products, 12 months for exports of capital goods, and 18 months for exports refinanced by YBIEC except as provided under para. 80 below. Sub-loans will carry interest at the six months dollar LIBOR in effect on the day of the sub-loan commitment, plus a spread of 22 for the EDF to cover its risk of losses, both to be paid in foreign exchange, plus a spread of 1I for the intermediaries (to be allocated between UBB, the authorized bank of the sub-borrower and YBIEC, as the case may be), and an annual guarantee commission to the authorized bank of the sub-borrower of about 0.4% of the - 43 - sub-loan amount, both to be paid in Dinars. In case the sub-loan interest rate including the 2% spread to the EDF and the 1% spread to the intermediairies would be lower than the applicable Bank rate on the day of the sub-loan commitment, the spread to the EDF shall be increased to equalize the sub-loan interest rate with the applicable Bank rate. 80. In accordance with the stated objective of the Government, a special feature of the proposed EDF will be its capacity to grow and, possibly, to become over time the nucleus of a foreign exchange market which would greatly facilitate imports of Yugoslav industry in the long run. In order to ensure proper repayment of the Bank loan out of EDF without, however, depleting the EDF and maintain its growth in volume over time, the EDF procedures will have a built-in system of incentives for beneficiaries of sub-loans to sell, on a voluntary basis, a small portion of their foreign exchange earnings to the EDF, against domestic currency, over and above their sub-loan repayment. The system of incentives will consist of longer sub-loan maturities and larger size of sub-loans and maximum exposure. On the basis of present interest rate levels and average sub-loan maturities the sale of an average of 7% of sub-loans in foreign exchange earnings to the EDF by beneficiaries together with an interest spread of 2% for the EDF would be sufficient to increase the volume of the EDF by more than 5% a year, after deduction of the Bank loan servicing obligations. The domestic currency equivalent to the purchase of foreign exchange by the EDF will be provided out of Dinar borrowings made by the EDF. After consultation with the Bank, UBB will establish no later than December 31, 1985 or such other date as the Bank may agree, a mechanism whereby voluntary Dinar long-term deposits will be made to the EDF by sub-borrowers through their authorized banks. H. Categories of Goods to be Financed 81. All goods imported into Yugoslavia from Bank member countries required by eligible exporters (see Annex V, Section C), except goods in a few categories which are specifically excluded, would be eligible for financing under the loan. The excluded categories involve goods intended for military or paramilitary use, or goods for luxury consumption, or for petroleum products, or for food stuffs. A list of ineligible imports is given in the Annex to Schedule 1 of the draft Loan Agreement. Loan proceeds would represent less than 10% of the anticipated imports in the eligible categories, making rapid disbursement possible. I. Counterpart Funds 82. As sub-borrowers will borrow from and repay the EDF in foreign exchange, no local counterpart funds will be generated that could be used to meet local cost requirements of high priority investment projects. however, in order to further boost exports, the Government would use the "scommodity credits", which are being made available by export credit agencies of 15 foreign governments under the international assistance - 44 - package (see para. 15) to create seven revolving funds for exporters in the seven largest Yugoslav business banks. These credits, with maturities ranging from three to six years will finance imports of raw materials and spare parts for industrial exporters. Thus, the aim to support Yugoslavia's export drive through the proceeds of SAL is duplicated by other components of the international assistance package. J. Procurement and Disbursement 83. Contracts for the procurement of goods up to $2 million will be made in accordance with standard practices of the purchasers, which are acceptable to the Bank. Contracts amounting to more than $2 million each will be procured through International Competitive Bidding (ICB) in accordance with the Bank's Guidelines. 84. Procurement and disbursements for the proposed loan have been designed to ensure rapid drawdown of loan proceeds. The proposed loan will be disbursed at the rate of 1002 tf foreign expenditures of directly imported items through reimbursement to the Borrower. Expenditures under contracts related to export orders made after April 1, 1983, for which sub-loans out of the EDF have been granted, will be eligible for retroactive financing. In order to ensure that UBB will have ready access to foreign exchange, especially during the start up phase of EDF, a Special Account would be established within UBB to which the Bank would make an initial revolving deposit of up to $30 million. The establishment of the Special Account would be a condition of loan effectiveness (Section 7.01(a) of draft Loan Agreement). The Special Account would be replenisbed as soon as appropriate upon request of UBB. 85. The first tranche of the loan is expected to be disbursed by December 1983, and the second tranche within 6 months after the conditions of tranche release (see para. 78 above) have been fulfilled (Schedule 1, para. 4 to draft Loan Agreement and the Schedule to the draft Guarantee Agreement). Disbursement of the entire loan is expected to be completed by June 30, 1984 PART IV - OTRER BANK GROUP OPERATIONS IN YUGOSLAVIA AND RELATIONSHIP TO PROPOSED LOAN 86. Yugoslavia first borrowed from the Bank in 1949 ($2.7 million for timber production equipment) and, as of March 31, 1983, had received 76 loans, totalling (net of cancellations) $3,214 million. As of that date, $898.84 million remained undisbursed on effective loans. Annex II contains a suanry statement of Bank loans and IFC investments as well as the status of Bank projects under implementation. 87. The sectoral distribution of Bank lending has been as follows: approximately 35% ($1,248.4 million) has been for 23 operations in the transportation sector--12 for highways, 7 for railways, and one each for a - 45 - natural gas pipeline and an oil pipeline, and two for a port project. historically, Bank lending has concentrated on infrastructure including, in addition to the transportation loans, five power loans, one telecommunications loan, three water supply and sewerage and three multipurpose loans (two of which include substantial irrigation components). In recent years, Bank lending has increasingly focussed on the agriculture sector for which thirteen operations totalling $772 million (about $22X of the total) have been made. Twenty-one loans amounting to $475 million (about 13% of the total) have also been made for industry. Two loans have been made for tourism and the first Bank loan for air pollution control was approved in 1976. In addition, IFC has made fifteen investments in Yugoslavia totalling about $302 million. 88. The interrelated objectives which the Bank has pursued recently in its lending to Yugoslavia are to: (i) increase exports and improve the efficiency of import substitution; (ii) increase the efficiency of domestic investment with a view to increasing production with the more limited investment resources available; (iii) improve access to capital markets; and (iv) reduce unemployment, particularly in the LDR. Not every Bank operation can address all these objectives, but the basic thrust of the Bank's activities in Yugoslavia continues to be toward the development of the LDR. Underpinning this orientation are economic surveys of the four LDRs undertaken by the Bank, intensified Bank assistance in project formulation, and ongoing economic and sector analysis. 89. Yugoslavia's disbursement performance deteriorated somewhat in 1981 largely due to a shortage of local funds arising from financial constraints. Following implementation reviews of the whole loan portfolio with most Borrowers during 1981, performance has markedly improved in 1982. Yugoslavia's performance now, as traditionally, compares most favorably with Bank-wide averages and with most other countries of a similar per capita income. 90. The proposed content of the first structural adjustment loan concentrates on broad macroeconomic policy issues which are difficult to address through project lending. The SAL will therefore play a complementary role to our existing lending program. At the same time the SAL's objective of strengthening the overall policy environment will help implementation of both our ongoing and proposed future project operations in Yugoslavia. The Bank's future lending program has been refocused to support the Government's investment priorities in export oriented activities, energy and agriculture. Thus, while the first SAL contains some specific policy proposals in industry, energy and agriculture, these measures are principally intended to reinforce our ongoing sector policy dialogue particularly on issues of investment coordination and pricing. However, since these policy changes are likely to imply further restructuring in specific economic sectors, the Government and the Bank may - based on the studies proposed in energy, industry and agriculture - want to sharpen the sectoral focus of a second SAL. - 46 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 91. The draft Loan Agreement between the Bank and Udruzena Beogradska Banka, the draft Guarantee Agreement between the Socialist Federal Republic of Yugoslavia and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 92. Special conditions of the loan are listed in Section III of Annex III. Special conditions of effectiveness for the proposed loan (Section 6.01 of draft Loan Agreement) are the establishment of EDF and the Special Account. The disbursement of the second tranche of the loan shall be subject to the Bank being satisfied with the progress being made in the execution of the Government's adjustment program and specific actions taken (Schedule 1, paragraph 4, to draft Loan Agreement and the Schedule to the draft Guarantee Agreement). 93. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 94. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments June 2, 1983 Washington, D.C. - 4 7-~ ANNEX I IUosLAVIA - ue . uimscs 414 low Page 1 of 6 IIJOGELAVXA *0.SIn cu095 ucm IZ ImRAW oh MUST incus, D "lW ACICULTIUL 142.4 1960 b 1,70 lb WuNAT / 3on ow rin CAPuI 30) 350.0 140.0 260.0 2323.9 10281.2 KUNRG CONSUIUlON Prr CPITA (U S oF COIL . qUIVALT) 22.1 1604.5 2414.3 2107.4 7277.7 POPUlATION ASD VlTAL STATITCS POPtLAT1NM, NM-EAR (kTNAUs ) 13402.0 20571.0 2 23.0 URAN POPIIUATION (PERCENT Of TOAL) 27.9 34.8 42.3 47.9 73.0 POPULATION PkWOICTIOMS POPUTION IN lEAR 2000 (NLLIONS) 2S.S ATIOIT POPUATION (NILIOIM) 28.3 lEA STATIONAIT POPULATIN ZS SEACUR 2055 POPMLATIHON MI ! MR SQ. u. 71.9 79.6 8U.5 83.3 138.6 P SQ. NM. AICULTIRAL LIS 124.2 139.6 155.5 153.4 509.7 POPUATION A5 SWRUCTURZ (P3333) 0-14 US. 30.3 27.4 24.6 31.1 22.7 15-4 IRS. 63.2 64.5 66.5 41.2 65.7 65 Us. AN ABOW 6.3 7.8 3.9 7.7 11.6 OPauTION aOM RA7s (PERCENT) TOTAL 1.2 1.0 0.9 1.6 0.8 SEAR 3.6 3.2 2.9 3.5 1.4 CUM uU 1A13 (M TGOIA) 23.5 19.0 17.0 23.6 14.5 0115 AlE7I RAZ (R TWSAD) 10.0 9.0 9.0 9.2 9.3 GROSS RZPWUCTIU RATE 1.4 1.3 1.1 1.4 0.9 FAMIL PLAMUIMG AC31155. ANNOAL CUOSAIS) 1533. (P3103W (IV NARIIIR UOMI) .. 50 FMOOD l13 UWTIrnM INDEZ of POW PROffUTIoN PU CAPITA (1969-71.10) 35.0. 93. 117.0 114.0 111.1 PE CPITAL SUPPLY or cAou_S (1303 oP. OVIzSUIs) 128.1 130.0 135.5/c 125.1 130.3 P3OTINSc (GSANS 13OLT) 95.5 93.3 100.91 92.7 97.1 Ol URIS ANIMAL AID PULSE 28.6 31.7 39.2ic 35.9 61.3 CSIO (AGZS 1-4) MLTŁXrT RZ 11.2 4.3 2.0 9.2 0.5 RIALYN iirr KCTAEnC AT 1M (WARS) 63.2 66.7 70.5 .67.6 73.8 IWAST ION?ALIT RAW CPM TEONSAIS) 32.0 53.1 32.5 65.1 11.3 ACCES TO sZn MASE (13RC.5T OP IOPU1ATlOEf) TOTAL .. 33.6 1AN u.4 62.0 nL .. 12.3 ACSSS TO rZCY DISPOSAL ( Or POPMATION) TOrAL .. .. U.BAN .. .. MDW. .. .. . .. POPMATION sP5rS CXAN 1616.2 1000.1 762.4/c 1105.4 620.7 POPULATION R MIRC PErSoN 632.4/d 406.4 361.9/ 634.4 246.9 POPULATION P33 POPTL RE TOTAL 135.5/i 177.1 155.8/ 234.8 1U22.0 URBAN P1.4/ 95.7 IOL.7/e 192.0 140.6 RRAL 1033.e.G 1 603.9 1035.34. AULISIU> UK ITAL m.. 17.3 U8.2/J 20.0 17.7 iWmz. urn OlP EousOLD TomL 4.0 3.8 3.1/.. IuI 3.3 3.2 3.3.. SUR, 4.4 4.3 4.1re AVERAGE 3UMBER OP P13300S PE MO TOTAL 1.6 1.4 OulBu 1.7 1.3 URL 1.5 1.5 ACBSS 70 UZCUI.-I (Pr253 eir rMUI) 7OTAL 54.5 67.9 .. URBN 97 98.4 .. .. .. ma&. 36.1 80.1 -48- ANNEX I Page 2 of 6 E!MCI"I!1" N U Im0 1970 I ZTzmnA rims03 XhIS3! scowIls WAR EsMOU "CTice ILWAD Is TOTAL X111.0 L01.0 *9.0 102.4 101.7 HALx- 113.0 108.0 09.0 107.1 103.3 FnW 103.0 103.0 33.0 .0 103.6 e603ui TOTAL 53.0 6.0 u.0 60.2 U.4 MALS 63. 73.0 66.0 "6.4 6.4 mmiix 53.0 56.0 76.0 54.0 64.2 10OC4DL, KIOL. (Z 01 EcNART) .* 2.4 20.5 31.6 16.2 IPZLu-URACE RATIO Panay 33..e 27.1 24.3 25-. 20.3 UCOmay 13.0 22.4 11.3 3.2 16.1 fLU? 1.130 1A13 (lUCUr) 77.0 63.5 .0q/f n.9 . POPULATI 3.0 35.4 U.S/e 51.0 334.4 lIMO UCZ1iYU In 1OU13D - POP1LATON 64.3 145.3 203.3 137.2 1021.7 S? UCZIV3U NI 10133 101ULAZ3 1.4 88.3 13.2 13.7 403.6 V31 1U (DILT Q 133*1 2surIM) CZOflAUO 33M U*-i POILAUN 70.3 83.3 103.1 112.3 331.2 -DEW A AUL ATUMNDAZ PR CAPITL 7.0 4.3 3.3 4.0 3.6 WV3r1.7 IL OI (TWUSAM) 8302.0 U3.7 422.2&. 3AWZ C1S1) 33.0 33. 36.0- 36.6 36.0 DIum Su clpn ) 63.0 31.0 23.0 36.7 6.2 23DSI3 (ECINT) 13.0 23.0 32.0 25.9 37.6 1ANTCIPATION am1 (PCER=) TOL 43.1 43.4 . 42.2 44.5 43.4 NMIL . 60.0 56.6 34.5 36.3 51.9 pYuW 30.9 30.6 30.0 32.6 32.4 eoIC IUESNCT RATIO 0.6 0.3 0.3 0.9 0.8 303DUSTRINUTION mCl or MAsI =c RECEIVD IT I12SS 5 PSICDIT a MNOSIOLDS 16.4/h U.1: 13.1. HIGHEST 20 QZIT oF 3 U S 41.37i 41.47 38.7 .. 43.0 LSS 20 PIEc? 0f EIIDu 6. 6.671 6.6 . 5.3 ZMlK3T 40 PIECZNT C1 10USUNf 19. 16.4z 13.7 . 16.3 POYZY TARGET GDPS ZSTD ED ABSOLUIL 1D1.! SU ULL (M PE CAPITA) 033*3 .. . .. . .. NU. .. ..... UT3MATKD RELATIV ?VZ ivz 20 hSDL (U P JOL CAPITA) POWIT ZMONS 11 99 (Pzt mill.. .. . .@ NUL .. .. 330.0 406.. t DCt LL T - .. Ult ailah. * Ubt qla. /a The grea averagee for cb hladcater are poptat1ou-e1abted arltlMtc seem. Cqrrae of eoutrles _m the lndlcAton depends an asUablUlty of daa and In et umifero. /b Unless oeherl oeted, data for 1960 refer to an yew aetwen 1939 ad 1961; for 1970. betme 1969 _od 19n; en for Meet 3acentUc"., betim 1976 and 1360. ,_ 19n; /d 1962; /, 1976; /f 1975; /Il In1dug ut reate ehe abroad; /e 196; 3, 1961. Iby. 1362 -49- ANNEX I ew NW= walcma ~Page 3 of 6 0310311710300*. doora ov 8 t Gamma31. og.o4.410. MM181*0 .Wh910 t01CVPM Ta11101W, St ob0 I t.1- . oft" rae b"an Pt . 11 o.3.r-. gb.1S.al t.Ep- do.1b.34e .8a, d CM 0.101t mi.. Clsm envra .1I0 '33101 by dt1 alt1... 310.33 soCLaco ... - .deam zbw1.10go.%. umd. ... 1 31 ams"o&% wosa,ta"..1 * 33 d1 t11y actoU) . g., 31033.igb 00an barroo _Wrm.. I I .r lb ."ab.rr 3,. -. . C 0* 133-a,3% 0*1m 1.40.01 1101.- 0* 1030 , 1 331110 ti.2 134 I1. 43300A. %- lb. 0010111 1 macI. ."318013. tomt1. ~1 Lb. .c2.o a2. d.arng .g.--o, 8.., 10p411.1.1I~ 1~ 113..nt .mi.w. m. sacb S.33.1o S" A..3 . mIb mama u mffr_-m-wr __mlad_ CLao mebmaan6.1..) F.r.W01h 0 *q..t man - 1001 .it.I .. ma r.3 -f ..gI- (1.. 101.1 mar . . .18.1 m t. camary arm aarmac s.mama30 3941."3 a.1124.441 101.311. t 1butl14 1 - 1 p33o mb. Cma 11111.1 ara4m0 -a baI.a 1.13.3 1 a.._ 133 L==0* .o(.1M. ma 0*iosa o.303inl: .1.8 b133 2.3. ama v6pmat1.3. artabl11om 9r..UIng 3.11013.1p 131 cip PER cowP 10113311 .3101133 1.13 raffi 1 311.r33. Pastas801 c33333 Sam31 233134*. SW"l 13.Itol. amarma. 1aw1". 13.11 Crime.417 1W c--3l-o arbad an 33114 Onm aLl., E191340 b..2.: 1660. an01 gm c3411.1.003.33 P-momily .1.81 by *, phyft111. (bol by. WM1. ma i j c , a11c1 03.1"am. 0013. sa4.12.. Itt.) 3311.8.1 .d 3l131, a.u.. ma v S&P . Imaz.a -W at smalc.1 toc11211.. VWI ofte1., an tien m 3 e-ao.n 0*1 W.. md .8 mon, ts1 antors (loo an1-11.1d. maa W3o3 01.,h.pd.I.3320 31.1315.3s 13311,.. 0* 1111) 3.0*10.0. ..1.J - o ..-an 19.. .1..n cmm mama.'00.S IV". ma t.1 3.3t.1. hapsa mrs, 133311.3 mad 01.1w ma t.. a.... wa110. 1 33.3..14 (.. ... e3say14L. lug.1..1100. a 9otoo owa -...110. 160. 1910. mad lag 1.1,- 0* barman.14 Ł.t 33331.0111 pmp 3.0.1.11.- T-l131110. 0*1.00 mamb, ad 3..-.m p, .3 -1... -b. ma -1o - amor"p 06011.3ot 1000- O-C- P.3.&.11- p-3.311. 33 l.ma - ISM P.1 . p. .-Ps..1 .ma.01tl 1..31 by. p010 mawop ma - m6asu*1 .....U, ma ratsuzloy 13360. analLusm. 30333311-17, 33.-U1.63.t1.i.0.p.33 lvct.3 mad Aftog 118. p 33 b1311 101c.*33.g b cmnt7'. 5,331 10*.3.121111 10.01. -Rs.)-tara;. .33.0. ma 3.1 - 1-..._ .34 801. lit. amata. mabilau or T3 7.1 103. U. 00- 1 3 0*10 10 1111. 0ltwI. 6030000 ma 1W0 mar010 ltarTlIlty m.31.1. 13.- 111.. %-S. .-Ug d-o0, 1. me 1.101. arban. ma" WM"0. 10110333313. 8..gUlqr c-df 03340 ft. 10-1W .. map. v" a Pilo&g ywf-.. ma l, cl-Cry S10. Cm -1mjd - aff KU-. -.40*1b.4 lm30114..tL 1311..r 2101.43.0.11*- 13.P meat117 .payl.100 coms S0. a 3133b 0101- -11.31 mcha0 - 3013. .31, ma 1-.0 - 1300 3... 33 3 1.01 malms, .. Lam. Va.0 2. only. 0I altar 1.3rak, 301.0 1113313 Palomar tchml-ga D0.1.10*. -ay.3117loIo.4 k120* opal 4.11 U1 .323. Z1 .31 ".117. 31 ra tIl -csom ra .. % 0103 vamor l.C .111 1.oo l .*t.o. I-Bce 1 P-, *--LI-: Cm3 .Mma a . ma . b2 333 c.1 1.10cL.d 1.11111t7ca .10Ch. P1331c33 adoca3, -3P338 arn13301. -31 mabo- Ch. ffl~.W 33... ..s o. 10001 20.04.t.10,*10cUn0 IMLtyg.- plrm _dT-- 1.0303 I1 80 Canal3 01 C-O.O p113. 10333 700 _vl. 13.. 1.11. 1. ...13 - 7 - Aaosl..lry p.p...tI. 33.1.34. smrtl. .-133103. ma, 1.010 1.31 10331.l11.3, 0*333313 010 M"1 mud'.13a .011 .1 UZ M317 p.- ad opz: CI0oomoW arm 6303117, 33.-I201. CrIy 03310.6. Mq - W3l.y-3 300P1.1Z.. PC1 *-o 111.0t.. (1M331133..) .8 lo.totIi .W;-11. fotllm 01.r m. - 3311c01 3St1.11 F. .. . .331.11. I1." - 8.3.0.4 . 6 lot .w1.l I.d m1y ar 303010.3. at -.m.."Y 10331.1103 .31; 60.29 ma 191M v.c. 701-t.013 1331" - 3100t,. ma .. 9.a. - 01I.1 t.6ma, p1md20 . 0*0131..a- 1133313(33330. - 0114133 40-14 103303. b133M-m4n W1- PIX-, ma W137 9.030. 4103b404 b 10*3.8 Z0-*333 S. Sb. va1.31.. ma o.tCt.1 (as g.... ma 0) 33Pmant"an a ..141331 mo.. 1011003-Ama1. &01- 132..; 1660. 191 .-ma 116 4.3.- L*3 1011..1.10..0) 9.3,0 *1t*, 13313, - 3004 ma .121. vmmanr. Cr- 3131 0*tar.300) - c01.1 - A-"1 33031 733 13004'0031016 03 .31.1 .1.13 33p.1t0 ma Id Xs V * 0661. 3Wpp.0l 0 162U040. 11W-10. ma 197040 33.112- C-.1% 301. 10.3.031 - -b-. - Am-I. a3.o3b raoo .1 .11. w- C 2011. - 333190-60. 1160-10. ma 1610-40. 3000000 ot, (0 Ch--& 10.01.1100 - TP00000W 1010, 1133 taC 8.*0.1300 .. t-o.3) - A.1 11 11- 1d11. P.- -C..o o1.1-7.0 000 000110 1003 10* 01i1p. v- 31.&.3 0*01031.., 1.3 mad pap101100: 166. 1310. 0* 1IND 4.30. 01111007-11.l- Ct01.m oaaa 3.(01 0h* - dmb01. p.1 313mar a P8 37-03 30410 301..33 (.- f .. - 01U 1,90at.0 I- t...Cad1.3 .41 p.00.11. 160.110.ma12 ob 6 m01.n M. om-.1 33111VW t0*0* 013.0p02.30: -.1.1. .- cam3 30.10 _o03 - a-ag -0* or 4.4gh113100ana .112 1.01 J. 111.00. -1.11,. S3 l. caarma, 1 10080r vrm glarmal.. .8 1.11 13100.331 71.401*1l3 p.11.4 tf an. .pmriaamm,Pamora .g.-.p.111 80c- ma, mmiS. 011.11:ma 101.-83 yama70, a07, 13t 1. 33.p.110,.0c 311117 mot.. .-.011, 1 1,-.T_ a-1p 00a13 1 1660. 1970. ma 193. - 10WI... obolI.b. 1001 70011 1.3300 c1.3101.,. 1o..ol Odtb...*) - A_- -m1 a ad*1. .e..ma3 rn..(. 1033 3.033)-1 031 1. 11.00.1c 1. .8M int1o i) - m.e0160 10 -3.3110 ma A. y3o% .10.1.3333.1- *8 TV O 2. U-ol. .2 chudbrar"s (1p, -0 V-01) ". mom bIrtb1.1W01 ...c..,t. != ~.circ.1011. - . Cm- 9..0 00.01d . S- Cm.. ...iw1 .11 am13104 S. 300030, manS,3. c63c001.1mu ota 0330300 0003000. 1.13004 0 5,loako 3.11 n13 1..330131133311 13 s.11413 'al0 - it 21 2 40 - 13ZAID 10 b. 4011ye It U1 otoo M.3 0 1*3 100.01Cs .1 II.1 1u1*1 o13 .C"11. 0* 10.1013 33l31Cm 30.1. *018.. ma L.0113. *.lmd 30 p704010 C111.mazzh.:Cm 11.40. 1910. m 4A.11. . an -bi. .. 0*n). C-3 330 .1. 311 3.1 4.p. 0311310031. 1031100 X9.1-1t 31*10. 2011 1.304" WEr-.bc- . 23- 0 C= ma 1k2 ._&.I.. c-P . attn ar3310. m4 anada3. 2. 0*016. 301 ..9pp11. m.010. mal road. mand.. V.030 (00310.) - 0*1". 233w 1F300 3011W030 .1112 233..mb 10.c.. a."1. 00r.4esa byEm p133001o3 0* 2.....ica -ft1.11b11.3 306.13.- 1 W131 331q .9 cm"0 lob-. Cm .0*. lugt. 190 0113 ma. lIly -a 13.1t1, 1.014.-133 .03r13...1 1*lo 14 -olape*. man 011. (" .-1.) - bLmor 1.1 2. as0103. 11333r1c10.. ma-fac113 ha.o.1314 1001; 13U-314. 1910 mas 1977 di.e. 1940. 1910 ma 1630 1o.30 331 1.3. mauPIT8 .71.1.(g p 4.,) . ...-. 0131 31153*33 Pertain1) - 10103. 01c.. ma -.'- p33111I330*.r 33 .337.1 0 _0 0. --&U17.1"m" 2 4011004M0 33033 30.011317 00001 1.0e 301 ml." I. 2.. pa.34 0.- 3*.,l 8.1.1p-.-0 at~. . 40 .8mr treto 31.1.0 m- 1.7. ma 30 prmm of .31 .0 16W0. 210. ma 1660 4.t3.. oo 113 a.n 1.04d 00 3*0' PaC31C13330- 1"C 30203P 3001a.1. 01 33111 210 grm b13014. 0*011 313103. 00or.0 134.. 101332 __ 031.1.1 01 113 3330101101. and 2.33 1133 0*d. a 334.00.1.013133 cb- at 07151001 Pt.tot2 p.010. mad 2331033n,.1 Imo.tIeml. 0m manfrm*e.0.1 .-o.3.o. mal1331 OI po.*1 000 amain 101 t1. 314. F.33330 FA7 S 3 C0011 11114 kW3303 Intl.1. - 30110.8 pup1011.0 0Aw 12 - ma IS ma 301.4 33_o 10100; 1911.3). 1010 and 1377 de". Pot t.lt m,acaI. o03 ry 1. 011331 mat o.1 - Preoton oy 3 7.18f."4 A.- 110* traw sastalm.0'n3a20. grear. p.7 may; 1161.3). 19100*1If" dog. 1351U1 01)4 103 1-) 3031 301(7.110*0*)-.I 1..tb. v- t1.000 S.~t1. NU(loll 10 1001 and 114 01.04" 11111. 1r2.0 1330 4011.0 1van In8. tab1; 1In0. 1910 ma 1 101um.. 1001 ot1111n. 90ml 604.. *331 13;1033310100101 1..14.b,o 101100.I M" 4.10. 10 .8.3*01(.116 01 Zs Imm1) - 3.t.. W%-0. mad -al - som--WI12.011701..31. d1.3 Plotom ..tg. so.-Imad 3.Onstwart so0me C8 vpoW1 (1.1.2.L 1.Cmm and31 31 3000I1 100..0..81..4u1.. at103. g13l =ogl 03.I0 1. an .3101rm aO p.111 W.medlesson of 0* agaor. VA=0 1,w.01 2. 4110* 813 110 Treat star0do1m4.0 v."14W0r 0310 Vat3o., 13ws.0 POI 007 be 10.01 .1b 013..mm for Umar emmy. - 11133 000* mo00t. parmaws n Wo."mild 131 113 as 13in11. W1 1-sos or do ft w 0*11314 wo n mr"mu r mrao AD1 "0o3p- a36.3* 1L.0133.310*. pof an 0 lay 10 1.1331.3an 0*3. 31* warmo (0301. ad =1. - 131.. 000. gas D"&l lom. 30332. Utt.. 00100. and TW10) 03.04 SY 001131 433P.0. 00 lb.mazmLau ama -WUem&. u asm 01 m U p5aq -133.2.0133 a""1 by 70*. of .01.5.313,0 SW0* m I30303630 was ad*061 *130003011IW. 3031.*1.10mapiw10 33so- a 30.11040101Ip 013a02. 3p 3 - 50- AmIn I Page 4 of PcMUaiaa 22.3 mille (id1361) GIW Far Capita: =52.790 (19I4) nOU.A9X - icMC DDWC82 Amma_ Gruth gate-s CZ) (millie. 114 at (at ceaeteat 1972 pnries) ZUdicatar crract pria) Actual c_ r td _190 ei 1975 1974 1W?7 l9ts 1979 1960 1981 192 - 193 19 1985 1990 Cream demmaics pmodct ai 43.232 0.9 5.2 8.4 8.5 4.2 2.2 2.2 -1.0 -1.7 2.0 2.7 4.3 A8ricatar - 514 -2.4 4.4 5.7 5.4 5.4 0.0 1.0 5.0 0.0 2.0 2.0 2.0 indutry 25.501 7.4 4.1 9.5 9.3 8.5 3.6 1.4 -2.7 -2.0 3.0 4.0 6.0 services 24.993 1.4 5.3 7.1 13.1 -2.0 -2.2 3.4 -1.0 -2.0 1.0 1.5 3.0 C _acmptia 48.760 -3.3 0.0 9.8 13.0 3.2 0.4 -1.1 -0.7 -1.7 2.5 Z.4 3.9 Crean iauat_ut 23.218 10.1 3.6 17.4 -3.2 12.0 -3.2 -1.2 -6.0 0.0 3.0 3.2 4.0 luperta of GPs 1 4.053 1.1 10.4 -2.0 4.8 2.4 12.4 9.3 -5.7 -2.0 6.0 6.0 4.8 Imporct of MS 1U.799 -1.3 -B.6 16.1 2.5 MG0 -9.7 -2.6 -10.8 -2.0 *.7 6.0 5.6 Cream ntien" savinga 13.619 14.7 20.4 5.6 -3.1 3.4 5.8 - - - - - - deflatwr (1972 -100) 411 170 206 232 260 313 411 575 731 - - - - xcb~ re 24.9 17.4 18.2 18.3 18.6 19.0 24.9 35.5 51.3 - - - - Sair. of GMi at market Price. CZ) Avearge Annual lacraaa (2) (at current prices) b/ _C cet 1972 1960 19e70 975 1980 195 960-70- cram Doestic Product at 10.0 100.0 LO0.0 100.0 100.0 100.0 5.9 6.5 5.7 0.5 4.2 Agricultur 22.5 16.1 13.8 12.3 13.1 11.8 3.3 2.9 2.4 2.0 2.0 ledudtzy 42.2 37.4 4.3 41.4 41.4 44.7 6.3 8.3 7.0 0.3 5.9 sarwica. 29.0 38.1 33.1 34.1 35.7 33.6 6.9 4.7 4.3 0.2 2.9 Conumption 67.2 72.8 74.3 70.4 69.2 68.4 .5 4.9 54 -0.2 4.0 Crams iz.aatmt 36.5 32.3 33.5 30.5 29.0 29.0 4.7 5.5 5.3 -0.9 4.1 Uparts CUS 13.9 16.5 20.2 27.7 29.3 33.0 10.2 4.7 5.7 1.5 4.1 irpos CGPS 17.5 23.5 28.0 31.4 27.5 30.7 9.3 6.7 2.5 -1.5 6.5 ROa meational awipsa 32.6 29.4 25.6 28.3 29.5 29.9 5.3 4.2 6.5 - - 1960 1970 U195 10 1iil ruIC Yuo Tteal re_ue 27.9 33.1 6.3 34.0 32.3 Total ezpatura 24.1 33.2 37.2 34. 31.6 8:rpUa C ) .r dificic C-) 3.3 0.1 -0.4 0.6 0.6 _oraiga ficiag 0.0 0.0 -0.4 0.0 0.0 1940-70 1970-75 1975.6 1980-85 1985-0 CEMLUPCAMOS grc. raw CZ) 4.1 4.7 5.7 0.1 4.2 CW par capite graut rt. 5.0 4.4 4.7 -0.8 3.3 1Cta 5.4 4.4 5.4 35.3 7.0 leport *l-ticity 1.4 1.0 0.5 -3.0 1.5 a/ Ac markt pricaa; compents ara aapraaed at factor coat "inwill net a" up to tctal d to a:cluieoe of noa iatirect tcm. and subsidies. VI Projeectd Ye*r at ceeatmt 1972 prica.. tPA IC Aprit 19. 1"3 - 51 - Autr I of 6 population: 22.3 itioa (mid,-1981) GW par Capita: USS2.790 (1981) - L U-L78 --- t -_al Croth ltate (2) mitlieu S at (at cosent 17n uric.) Indicator etrac t prize) Actual - .o cted (1W18) 1975 1976 1977 197u 1979 190 198 1982-1183 198 1985 1990 r Aa. exports 10*286 0.0 14.5 -5.3 1.0 1.6 11.0 11.7 -6.2 0.5 6.0 6.0 7.0 primary a1 1.709 -3.1 16.6 3.9 1.5 2.0 2.5 -14.6 1.9 0.5 6.0 6.0 7.0 NI_f.etres hi 8.495 0.4 13.9 -8.8 0.8 1.5 13.8 19.0 -7i. 0.5 6.0 6.0 7.0 Narcbeaie Inpore 14.528 -2.8 -6.5 18.5 3.8 12.9 -10.5 -4.9 -10.0 -0.3 8.6 6.0 5.S Fe" an -60.9 45.8 4.3 -24.2 35.6 -2.3 -:.4 -13.1 0.0 5.0 6.0 4.5 patrolmen cJ 3.7&2 -5.0 10.1 12.0 11.6 7.3 6.2 -1.4 -16.2 3.0 5.0 6.0 7.0 Netbi_ry ed equipet 3.756 22.3 -8.8 17.8 7.1 15.4 -17.4 -15.6 -12.7 -5.4 9.4 6.0 6.0 Othro 6.123 -11.9 -12.7 22.1 4.4 8.8 -7.0 0.0 -14.1 2.0 9.6 6.0 5.1 nun (1972 - 100) *srt price index 31b in 1iO 202 220 259 30e 314 336 354 38 4111- 550 Iupotr price index 352 14 89 216 226 281 337 362 349 363 38* 607 560 Taen Of trae index 89.7 93.5 95.2 93.5 97.3 92.2 91.4 91.6 96.3 97.6 99.6 101.0 98.3 Cmpoeitioa of lendioe TXad CZ) Avoca" Amal Iremse (Z) -(at current prices) d/ (at caa 1972 prices) _ 1960 N970 L975 19O 19t5 1990 1960-70 1970-35 1974-80 1980-8 1985-90 xPOwrt 200.o0 1U0.0 100.0 100.0 100.0 100.0 8.1 5.7 5.1 2.5 6.8 7d_q7 49.6 29.4 19.5 22.0 21.0 21.0 - -1.3 6.0 2.7 6.S _Sn_afctem bl 50.4 70.6 80.5 78.0 79. 79.0 - 8.1 - 4.7 2.6 6.8 IxPoite 100.0 110.0 100.0 10. 0 100.0 100.0 9.0 7.4 4.1 -1.6 6.5 Fed 9.1 7.2 5.5 7.2 8.5 8.0 - 5.0 14.9 -4.0 5.4 Petrolems cl 5.4 4.8 12.3 23.6 8.7 8.6 - 8.2 7.2 1.3 6.1 1e-binery Zd eqaiz,-t 36.8 33.2 33.9 28.0 29.2 29.7 - 9.4 3.1 -3.6 6.9 Ot0e 48.7 54.8 48.3 41.2 53.6 53.6 - 6.0 3.5 -0.7 6.5 Shar of Treef with SOma of Trod with :sare of Trade ith Capital Shar of Trde with Ieatra Cerie (2) D C_etrije (C) swE1I_ Oil Ezportem (2) Cetrally u a cn -oomian cz) 196S 1870 1975 1I1 196S 1970 17n IS61 196 190 1975 161 1965 1970 197S 191 eDCZ or la*n aPere *0.1 53.3 36.0 31.0 17.4 13.6 16.8 18.3 o.4 0.7 2.1 11.8 42.1 3. .4 7.1 48.9 Prim-, 61.0 70.2 54.0 - 9.1 8.2 8.9 - 0.2 0.2 1.9 - 29.7 Zl.; 35.2 - N =n.facture 24.0 41.9 26.0 - 23.8 17.2 20.0 - 0.6 1.0 2.1 - 51.6 3.9 51.9 - imports 55.3 66.1 59.1 50.1 16.0 12.7 13.7 15.3 0.1 0.1 0.6 9.1 28.6 21.1 24.6 30.7 ei sI e0-4 W sUrc S-8 ci SIC 3; includes Iubriceet. coal d electricity. ;i rjcted yes at co_tAt 1972 price. Nay 24. 1983 -32- APE I |g/||>~~~~~~~~~~~~~~~~~~~~~~" _b or r D a 30c=wfl - &AIlS Or PAUfl. fl2CmL CAPIrAL Sm 33w (m3e Million.) pejacil 23.3 w1u (111 zndacec.r Acto.olesca 1970 1975 3978 1927 397a 1979 lo 19o 1is t/ 12 13 185 19" SiLAS OF P4WMg Kgta@ goowds * - Semices 3.037 *.DU 9.142 10.3" 32.069 34.276 10.300 30.007 39.*77 20.916 23.J58 2 ."6 4*.7m of wich: Itd_chis f.e.. 1.679 41073 4.493 5.19S 3.309 6.794 8.978 10.26 104.247 Ł1.019 12.615 14.374 26.723 'opsers of gooa nad _e-e 3.38 S .01 8.J77 11.9" 13.352 17.927 20.392 20.954 20.340 20.924 73.780 263119 65.191 of nick: ine _hnio c.i.f. 2.374 7.697 7.361 9.739 10.439 14.019 15.06e 14.S3 13.336 13.397 15.397 17.291 12.513 Net tr f - _ Coster _cesar hlate -348 -3.001 165 -1.366 -1.213 -3."I -2.292 .467 463 32 -395 341 " Pryer. 4330c eo.lo - - - - - - _ _ _ _ _ _ Z lois (stel 19b 931 1.094 1.432 I."9 1.00. 2.410 a32 130 1.429 342 -269 834 atfaciol i3 246 212 63 123 13 39 1.3 1.050 1.349 2.69 I.96 393 ftisss u7 Mns "a 1.371 1.26 a7 2*371 -S 3 420 -120 -2.0e6 -2.225 -37 Oter t1 38 133S 319 S3 541 1.487 657 34Y -679 97 10 1339 -G fla~e_a roseie. 114 S -1.378 -131 452 I.U65 -n7 -238 1.012 -1.000 - 77 -390 -751 ZstsooottflBl noon 7i _ 276 1.02 2.30 3.013 2.63 2.495 3.273 2.487 1*675 2,675 3.112 2.2 6. 28 of flick: C.za (officil oolo. ) 51 42 62 64 7 78 73 78 78 78 7 o k 1.0 2.0 3.5 3.0 3.3 1.7 1.9 I.3 130 1.5 1.6 I.* 1.8 CmL CAPTAL o rJT SOrs. di6ors*.MMA 611 1.647 2.096 2.63s 2.500 2.433 4.156 2.770 2.064 4,.11 2.03 2.678 3.G6G OUicia gems - - - --- CooimmS laes 67 1s 13s 59 29 13 - - - - - DeC 0 71 62 6 31 11 Zs 8 - - - _ wnl - - - - - - - - - - - - - is _ - - - _ _ - - _ _ _ _ _ OchDr 673 63 72 93 l 2 3 4 ass....crooiooel 373 2.037 3.*62 7.30 2.671 2.423 4.134 z.7s5 2.04 4.114 I.059 2.678 3.62 Offaeil -.rc croiOn 39 203 2.3 75 74 G0 33 1.375 1.07S 1350 sit 341 *4D 23O 37 136 119 133 no 294 25 231 231 sS 577 338 aG Other nItalaoI" - - - - 8 34 36 1s - - - - - ti~ 0497 1.60 3140 2.290 2.40' 2.067 3.757 1.09 "65 23200 7.000 2.000 3.000 !u3eel.v so poer crit (sen 1-57) (-23 (0-tD) (-183) (-106) (-2 (-3003 (fl) (-00) (-2203 (-740 f(-123) (-390) gat.ool debt Dec oncotamise sod gjakeof 6/ 2.053 S.AW 7,In * .9 11.117 13.a6 15.66 14.354 Mm 17.716 13.37I 18.107 U2.9U2 *ofLeitl -4 2.327 3.792 3.053 3.410 3.442 4.552 3.019 6.069 7 613 10.315 12.272 238.I prince 1.1" 3.493 4.3*0 3.871 7.707 9.94 10.394 11138 10718.n r 1D 09 8.02 s 837 -m D-na_ermod dm 968 2.971 2.325 4.435 3.713 3.17 2.S42 1.967 3.538 1.515 3.4 1 1.60 301 ok.e s l *ask o.ns_ py- 303 1.441 1.440 1.395 u.m 2.12 2.41 2.490 3.907 6.39 4.38 3033 3.359 2.ee oet f128 n9 302 367 373 821 s93 1 757 1.893 n.710 1.941 20on 2.327 P_ *eca - _ iezt 16.6 13.0 15.8 13.6 14.9 14.9 13.3 18. 19.3 21.0 13.5 18.9 12.2 Asoroe into-got race - ann L_i (2) 7.1 3.1 7.1 7.4 7.7 3.0 3.6 12.7 11.9 11.3 12.9 12.9 14.0 Official 7.0 5.3 7_0 7.3 7.7 - - - - _ - - - Ptince 7.5 7.5 8.6 9.3 5.7 9.5 - - _ - _ - _ :omg atorn7y r am 1_os Cyose) 16.3 13.2 13.3 15.4 13.1 10.8 10.1 10.1 I1.2 7.4 10.2 10.3 9.0 Officiel 33.3 16.3 10.0 13.9 13.1 - - Priest 10.9 10.9 3.7 7.5 - - _ _ _ _ _ _ _ .ZlJs noe, es of NW t"iot (d ,, se lass r.ec . net 0Of sezt-rM crjt od chos_- AS biltr-l - hedb.. c/ IclSIog gross Sorwigpo asst. of cin a hak.. Vasbosl herosio rOpstt ism th iwac l b-laoce Of aeses*t is ct esiato with sote1 doct d8te. zEL IC -f Coe setsio OcldeO messics w iscoroo on opert d._it aromsi by rSholes.t. april 39. 3933 Af tar-1. 1s A peoocs - ws of VW r . - 53 - ANNEX II Page 1 of 12 THE STATUS OF BANK GROUP OPERATIONS IN YUGOSLAVIA 1/ A. STATEMENT OF BANK LOANS (as of March 31, 1983) USS million Amount (less cancellations) Dumber Year Borrower(s) Purpose Bank Undisbursed Forty Loans fully disbursed 1,339.46 916 1973 Naftagas Gts Pipeline 59.4 8.05 1262 1976 Republicki Fond Voda WasAr Supply, Sewerage & ister Resources 20.0 0.22 1263 1976 Sarajevo Water Supply & Water Supply & Sewerage Enterprise Sewerage 45.0 0.07 1360 1977 Management Organization Multipurpose "Netohija" Water 54.0 31.73 1370 1977 Investiciona Banka Agriculture Titograd Industries 26.0 2.60 1371 1977 Stopanska Banka Skopje Agriculture Industries 24.0 3.11 1469 1977 JUGEL and six Electric Power Organizations in Second Power each Republic Transmission 80.0 11.06 1477 1977 Vojvodjanska Banks Second Agricul- tural Credit 75.0 7.74 1534 1978 Community of Yugoslav Railways Railways 100.0 3.01 1561 1978 Elektroprivreda Bosnia Herzegovina Hydro Power 73.0 11.48 1611 1978 Kosovska Banka Pristina Third Industrial Credit 40.0 7.90 1612 1978 Privredua Banka Sarajevo Fourth Industrial Credit 20.0 1.44 - 54 - ANNEX II Page 2 of 12 US$ million Amount (less cancellations) Number Year Borrower(s) Purpose Bank Undisbursed 1613 1978 Stopanska Banka Skopje Fourth Industrial Credit 20.0 3.90 1614 1978 Investiciona Banka Fourth Industrial Titograd Credit 20.0 1.53 1616 1978 Stopanska Banka Skopje Macedonia Strezevo Irrigation 82.0 0.71 1621 1978 Privredna Banka Bosansks Krajina Sarajevo Agriculture and Agro-Industries 55.0 31.20 1678 1979 Road Organizations of Kosovo, Montenegro, Vojvodina and Beze- govina and Macedonia Roads 148.0 41.95 1756 1979 Zagrebacka Banka Croatia Sava Drainage 51.0 33.14 1768 1979 Port of Bar Earthquake Rehab- ilitation-Port of Bar 50.0 33.63 1769 1979 Railway Organization Earthquake Rehab- of Montenegro ilitation- Railways 14.0 7.61 1801 1980 Vojvodjanska Banka Third Agricultural Credit 86.0 56.11 1819 1980 Road Organizations of Slovenia, Croatia, Serbia and Vojvodina Roads 125.0 76.42 1909 1980 Kosovska Banka "ristina Fifth Industrial Credit 50.0 46.55 1910 1980 Privredna Banka Sarajevo Fifth Industrial Credit 30.0 11.14 1911 1980 Investiciona Banka Fifth Industrial Titograd Credit 20.0 19.31 1912 1980 Stopanska Banka Fifth Industrial Skopje Credit 10.0 2.80 -55 - ANNEX II Page 3 of 12 US$ million Amount (less cancellations) Number Year Borrower(s) Purpose Bank Undisbursed 1951 1980 Investbanka Agriculture & Agro-Industries 87.0 74.63 1977 1980 Pristina Railway Transport Organization Railways 34.0 26.22 1993 1980 Kosovska Banka Pristina Agriculture & Agro-Industries 90.0 83.22 2039 1981 Stopanska Banka Skopje Agriculture 80.0 67.04 2055 1981 Radna Org. Regional Vodovod Kosovo Water Supply 41.0 29.22 2132 1982 Privredna Banka Sarajevo Sixth Industrial 33.0 32.51 Credit 2133 1982 Stopauska Banka Skopje Sixth Industrial 33.0 32.51 Credit 2136 1982 Privredna Banka Sarajevo Agriculture 35.0 34.48 2161 1/ 1982 Privredna Banka Sarajevo Semberija Drainage 34.6 34.60 2233 1/ 1983 Regional Work Organiza- Tuzla Water Supply 30.0 30.00 tion KOZPRED and Environment Total (less cancellation) 3,214.46 898.84 of which has been repaid 597.21 Total now outstanding 2,617.25 Amount sold 9.2 of which: Amount repaid 9.2 Total now held by Bank 2,617.25 Total undisbursed 898.84 11 Signed but not yet effective. - 56 - ANNEX II Page 4 of 12 B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1983) Fiscal Type of Amount in US$ million Year Obligor Business Loan Equity Total 1970 International Investment Investment Corporation for Yugoslavia Corporation - 2.0 2.0 1970/ Zavodi Crvena Zastava Fiat S.p.A. Automotive 1972/ Industry 12.4 0.6 13.0 1980 1971/ Tovarna Automobilov in Motoriev Automotive 1980 T4aribor (TAM)/Klockner-Humboldt Industry 9.2 0.9 10.1 Deutz A.G. (KHD) 1972/ FAP-FAMOS Belgrade/Daimler- Automotive 1980 Benz A.G. Iadustry 16.3 0.8 17.1 1972/ Sava Semperit Tires 12.5 2.5 15.0 1978/ 1980 1973 Belisce-Bel Tvornica Papira Pulp and Paper 70.9 - 70.9 1974 Zelezarna Jesenice/ARMCO Special Steel 10.0 - 10.0 1974 Salonit Anhovo Cement Plant 10.0 - 10.0 1975 RMX Zenica Steel 50.0 - 50.0 1977 Frikom RO Industrija Smrznute Food and Food Brane/Unilever Processing 4.0 2.4 6.4 1977 Tvornica Kartona i Ambalaze Cazin Pulp and Paper Products 15.6 2.6 18.2 1978 Soko-Mostar Hermetic Compressors 7.0 - 7.0 1980 Investiciona Banka Titograd- Udruzena Banka Tourism 21.0 - 21.0 1980 Radoje Dakic Machinery 18.7 - 18.7 1980 Eight Republican/Provincial Small-Scale Banks Enterprises 30.3 - 30.3 1982 Igalo Physical Medicine Center 16.5 - 16.5 1982 Industrija za automobilaki Motor Vehicles Delovi I Traktori (Ruen Auto) & Accessories 11.3 - 11.3 Total Gross Commitments 315.7 11.8 327.5 less cancellations, terminations, exchange adjustment, repayment and sales 173.5 5.2 178.7 Total commitments held by IFC 142.2 6.6 148.8 Total Undisbursed held by IFC 38.7 0.8 39.5 - 57 - ANNEX II Page 5 of 12 C. PROJECTS IN EXECUTION 1/ (As of March 31, 1983) Loan 916 Naftagas Pipeline: US$59.4 Million Loan of June 25, 1973; Effective Date; March 22, 1974; Closing Date: June 30, 1983. For a variety of reasons substantial delays occurred during the implementation of this project (cost overruns, administrative hurdles, organizational change, etc.). In December 1979, the Government requested and the Bank eventually agreed to divide the loan into two tranches, Naftagas Gas Unit (NGU) being in charge of the pipeline in Vojvodina, and Butangas of the pipeline in Serbia. The amendment of the loan was approved by the Bank in November 1980, and became effective in May 1981. The pipelines in Vojvodina and Serbia are now under construction. The only outstanding major contract still to be awarded before the current closing date concerns Butangas' telecommunications and supervisory control and data acquisition (SCADA) systems. Depending upon early contracting of the SCADA system a further and final extension of the closing date is under consideration. Loan 1262 Morava Regional Development Project - Water Supply, Severage and lvater Resources: US$20.0 Million Loan of June 14 1976; Effective Date; November 3, 1976; Closing Date: December 31, 1982; (account left open). After some initial delays, the project is progressing satisfactorily. hajor works still to be executed are the Vrutci dam and water supply distribution and sewerage network in Titovo Uzice. The loan was closed on December 31, 1982 (after two extensions) but the account remains open to allow disbursement in respect of expenditures under contracts signed before the closing date. Loan 1263 Sarajevo Water Supply and Sewerage: US$45.0 Million Loan of June 8, 1976; Effective Diate: November 9, 1976; Closing Date: December 31, 1982; (account left open). Construction works are proceeding well and the project is substantially completed. The loan was closed on 12/31/82 but account remains open to allow final disbursements. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 58 - ANNEX II Page 6 of 12 Loan 1360 Metohija Multipurpose Water. US$54.0 Million Loan of February 3. 1977; Effective Date; JulY 27, 1977; Closing Date: December 31, 1983. Radovic Dam, intake weir and feeder canal to the reservoir are completed. Overall project progress is about three years behind schedule and the Closing Date has been postponed initially by one year to December 31, 1983. Contract for ICB procurement of G.R.P. pipes was signed on January 22, 1983; however, it was necessary to reduce the scope of supply to conform to the tender. Modified contract is expected to be validated on April 8, 1983. The single remaining ICB contract for automatic regulation equipment is expected by mid-hay, 1983. Based on current progress, all LCB contracts should be awarded by July 31, 1983. Irrigation system for about 12200 ha will be ready by 1984. Completion of the total system is now planned for December 31, 1984, which will fit in with current plans for land consolidation. Loan 1370 Montenegro Agriculture and Agro-Industries: US$26.0 Million Loan of March 10, 1977; Ef.ective Date: July 27, 1977; Closing Date; June 30, 1983. The project is substantially completed. The winery operations are completed and operational. rarm center construction is complete and farm roads are nearing completion. The completed irrigation system is supplying 2,014 ha under vineyards and orchards. The loan is 90% disbursed. Due to high rates of local inflation costs have exceeded appraisal estimates by about 60%. Loan 1371 Macedonia Agriculture and Second Agro-Industries; US$24.0 Million Loan of March 10, 1977; Effective Date; July 27, 1977; Closing Date June 30, 1983. Due to delays in implementation of social sector sub-projects the loan Closing Date has been postponed by 12 months to June 1983. Recently, progress in project implementation has shown improvement as all contracts for construction of agro-industry facilities have now come into force and four of the sev.tn sub-projects are completed. Contracts have been signed and approved for the remaining sub-projects. All individual sector funds have been completed and disbursed. The loan is 87Z disbursed. Loan 1469 Second Poier Transmission: US$80.0 Million Loan of July 11, 1977; Effective Date: January 31, 1978; Closing Date: June 30, 1983. The project is expected to be completed with a delay of about two years and the closing date has been extended by six months to 6/30/83, in order to allow fiAll loan disbursement. The loan is practically fully committed. The Borrowers have been advised that there would be no further extension of the closing date. - 59 - ANNEX II Page 7 of 12 Loan 1477 Second Agricultural Credit: US$75.0 Million Loan of July 29, 1977; Effective Date; January 30, 1978; Closing Date: August 31, 1983. The loan is fully committed and all agro-industry investments are in the implementation phase. Implementation of the project is about one and a half years behind appraisal estimates. About 902 of the loan has been disbursed. As a result of the Government's recent stabilization measures however, exceptional delays in contracts coming into force have resulted and consequently the closing date has been extended a second time, to August 31, 1983 so as to be able to disburse against purchases of equipment for the agro-industry component only. Loan 1534 Fifth Railway: US$lOo Million Loan of April 13, 1978; Effective Date; September 28, 1978; Closing Date; June-30, 1983. Bank financed investments have progressed well and disbursements total US$ 97.0 million. The level of compensation payments has however increased and substantial tariff increases have failed to keep pace with inflation. Remedial actions will be agreed upon in the context of the proposed loaxi for a Sixth Railway Project. Loan 1561 Middle Ntretva Hydro Power; US$73 Million Loan of May 31, 1978; Effective Date: November 15, 1978; Closing Date; June 30, 1983. Part A of the project (construction of the Grabovica and Salakovac Dams and power plants) has been completed and both Grabovica and Salakovac have been in operation since December 1982. Part B, originally not financed by the Bank (Mostar Dam), however, has been delayed by problems with the site geology and funding. The technical problems have been solved and the detailed designs of the Mostar dam and power plant are now available. Regarding the funding, a supplemental Bank loan is now under consideration. If action on this loan is taken before June 30, 1983, Part B of the Project could be completed by December 1987, assuming that funding for the local costs is forthcoming. - 60 - ANNEX II Page 8 of 12 Loan 1611 Third Industrial Credit: $40.0 Million Loan of July 26, 1978; Effective Date: November 16, 1978: Closing Date: April 30, 1983. The loan is fully committed. Disbursements are behind appraisal estimates due to late approval of two large "special subprojects" and changes in the originally approved equipment lists and often incomplete withdrawal applications. The Industrial Credit Department of the borrower Kosovska Banks Pristina (KBP) continues to be weak, especially in terms of proper project appraisal and supervision. This matter is being focussed upon through frequent supervision. Also, institutional improvements will be a major component of a proposed new loan to KBP. Loans 1612, 1613 and 1614 Fourth Industrial Credit: $20.0 Million each Loans of July 26,_1978;_Effective Date: Ncvember 16. 1978; Closing Dates: December 31, 1983. The loans are fully committed. Disbursements for Loans 1612 and 1614 are well ahead of the disbursements expected at appraisal, while Loan 1613 is somewhat behind appraisal estimates. The closing dates for all three Loans have been extended from December 31, 1982 to December 31, 1983. Loan 1616 Macedonia Strezevo Irrigation; US$82 Million Loan of August 23, 1978; Effective Date: February 14, 1979; Closing Date: SeDtember 30, 1982; (account left open). Project construction has been substantially completed. The loan account has been kept open in order to enable disbursements against contracts for which commitments have been made prior to September 30, 1982. $81.29 million disbursed as of March 31, 1983. Loan 1621 Bosanska-Krajina Agriculture and Agro-Industries: US$55 Million Loan of November 6, 1978; Effective Date; March 28, 1979; Closing Date: June 30, 1983. Project implementation has been delayed by about two years and an extension of the closing date will be necessary. Cost overruns h&ve neces- sitated a reduction in scope of the project. Recently, the implementing agencies have taken actions which will improve performance. The fV ancing problem and inadequate progress in the individual sector has been resolved and specific action programs have been agreed with the borrower and the implementing agency. As cf March 31, 1983 about 93 percent of the loan has been committed and 45 percent disbursed. Given the stage of overall project implementation, the most likely completion date would be December 1984. - 61 - ANNEX II Page 9 of 12 Loan 1678 Tenth Higlway: US$148 Million Loan of April 9, 1979; Effective Date: August 14, 1979; Closing Date: September 30, 1984. Project now faces delays of about 15 months because of reduced road expenditures now planned by Government. Revised investment plans prepared by all participanLs. All links are now committed. Works will now extend to early 1984 in Kosovo, Vojvodina, Bosnia and Macedonia. Only Montenegro has completed its program according to the original schedule. Loan closing date has been postponed to September 30, 1984. Loan 1756 Croatia Sava Drainage: US$51 Million Loan of October 11, 1979; Effective Date: April 17, 1980; Closing Date: June 30, 1985. Decisions to award contracts for supply of equipment and construc- tion of civil works have been finalized. Project management problems and inadequate funds together with import restrictions had calused procurement delays. Revised financing plan with assurance of funds has now been prepared and import restrictions for the project have eased. Studies on sub-surface drainage had a delayed start. Progress on civil works, although somewhat behind schedule, is satisfactory. Land consolidation is progressing on schedule. Farm development works are progressing. The loan is 35% disbursed. Loan 1768 Nontenegro Earthquake Rehabilitation - Port of Bar: US$50 Millior. Loan of November 30, 1979; Effective Date: .A4ril 29, lb;QI, Closing Date: June 30, 1984. The project is currently about two years behind schedule, primarily due to delays in preparation of designs and contract documents for civil works stemming from more rigid design criteria to withstand earthquakes and from the lack of adequately experienced project and support staff. Bank missions have repeatedly emphasized need to strengthen staff, and part management has recently taken remedial action. Contracts for civil works are in progress and should be completed by about May/June 1983 or shortly thereafter. Bids for workshop equipment and for new tugboats have been received and some contracts awarded by PBWO. Deliveries of equipment and tugboats in early 1984 appears likely. The original closing date of December 31, 1982 has been postponed until June 30, 1984 to allow for longer than anticipated delivery period for remaining Bank financed items. Loan 1769 Montenegro Earthquake Rehaubilitation - Railways: US$14 Million Loan of November 30, 1979; Effective Date: April 29, 1980; Closing Date: June 30, 1983. Disbursements of about $6.39 million for urgent reconstruction works have been made. Contracting procedures for remaining works have been slower than expected largely as a result of complicated engineering design for repairs to a badly damaged tunnel. ahe Borrower's request for an extension of the closing date is under consideration. - 62 - ANNEX II Page 10 of 12 Loan 1801 Third Agricultural Credit: US$86 Million Loan of February 29, 1980 Effective Date: August 25, 1980; Closing Date: March 31, 1985. Progress in commitments in the social sector is very slow. In the individual sector, 93% of funds are committed, while in the social sector only 41X is committed. The agroindustry subprojects have still to be identified in some Republics; and a few approved processing facilities are behind schedule. The progress in physical implementation in the individual sector is good. The loan is about 35% disbursed. Loan 1819 Eleventh Highway: US$125 Million Loan of April 23, 1980; Effective Date: August 7, 1980; Closing Date: June 30, 1934. All contracts relating to the participating Republics/Provinces have been approved by the Bank. The Toll Study Draft Final Report has been reviewed. Cofinancing was obtained for an amount of US$ 110 million in October 1980. Due to implementation delays arising from shortage of local funds, project completion will be about 18 months behind schedule. The closing date has been postponed by one year to June 30, 1984. Further extension of one year might be necessary and would be considered on the basis of project implementation in accordance with a revised schedule. Loans 1909, 1910, 1911 and 1912 Fifth Industrial Credit: $50.0, $30.0, $20.0 and $10.0 Million, respectively, Loans of February 9, 1981; Effective Date: August 17, 1981; Closing Dates: October 31, 1984. Loans 1910 (PBS) and 1912 (SBS) are being committed rapidly, while commitments under Loans 1909 (KBP) and 1911 (IBT) are behind schedule. Commitments by KBP and IBT started late due to external factors, but have picked up rapidly and is expected to be completed within the currently stipulated commitment period. Loan 1951 Morava Regional Development II: $87 Million Loan of April 13, 1981; Effective Date: August 28, 1981; Closing Date: December 31, 1986. Eighty-five percent of the loan proceeds are committed. Withdrawals have commenced but are behind appraisal estimates. The delay is due to procedural problems in withdrawing Bank funds. This has been taken up with the Government in order to resolve the issue. As for the physical implementation of the Project, progress is very good. In the individual sector, about 800 livestock farms, 1,150 ha orchards and 140 ha vineyards are expected to be completed by the end of 1982, while 11 out of 14 agro-industrial facilities are uncder construction, of which 5 are likely to become operational in the Spring 1983. Progress under the irrigation component continues to be unsatisfactory. Action plans for support services approved by the Bank and implementation is underway. - 63 - ANNEX II Page 11 of 12 Loan 1977 Kosovo Railway: $34.0 Million Loan of May 15, 1981; Effective Date: November 16, 1981; Closing Date: December 31, 1984. After a slight delay due to expropriation issues, the project is proceeding satisfactorily Procurement of signalling and telecommunications (SS7TT) equipment and freight wagons has been completed. Upon request of the Borrower the Bank has agreed to a reallocation of loan funds which will become surplus because of favorable results on the SS&TT contract and the devaluation of the Dinar. The surplus funds will finance the acquisition of four diesel motor trains for which a contract will shortly be awarded. Loan 1993 Kosovo Agricultural Development: W90 Million Loan of June 15, 1981; Effective Date: December 23, 1981; Closing Date: June 30, 1987. About 252 of the Loan amount has yet to be committed and the Borrower, KBP, is behind schedule in hiring requisite support staff. Six agro-industry investors have signed construction and equipment installation contracts and work has started. The investors for two other agro-industry subprojects expect within the month to finalize contracts according to the bid evaluation reports, after considerable delays due to the investors' requests to change processing capacity or product line. The four remaining agro-industries sub-projects are being replaced, taking into consideration chinges in market potential of inputs and outputs. Out of 2,000 ha of plantation sub-projects, the Borrower has approved sub-loans to seven social sector iavestors covering about 1,600 ha for vineyards and orchards. For the individual sector, the Borrower has approved sub-loans for 300 ha of vineyards. For the Groundwater studies component, the consultants have completed the detailed terms of refezence and cost estimates and started work on hydro-geologic investigations. Loan 2039 Macedonia III Agricultural Development: $80 Million Loan of July 23, 1981; Effective Date: Januarv 6, 1982; Closing Date; June 30, 1987. Project implementation is ahead of s-^hedule. Disbursements are about one year ahead of schedule. The social sector yineyard (1,450 ha) and orchard (2,500 ha) components and the cold store component (15,000 tons) were fully committed. Individual sector investments are also ahead of schedule. Although near_y all feasibility studies have been completed, the small-scale irrigation compo-ient is behind schedule due to SBS appraisal bottlenecks and to problems with generating the 20% local contribution to be provided by the Communes. - 64 - ANNEX II Page 12 of 12 Loan 2055 Kosovo Water Supply: $41 Million Loan of December 14, 1981; Effective Date: April 14, 1982; Closing Date: June 30, 1985. Loan declared effective on April 14, 1982. Overall construction progress has been good and the quality of construction is high. Contracts for all major components of the project have been awarded. Due to several contributory factors revised total project cost has been reduced which will result in a savings of US$15.0 million from the Bank loan. Loans 2132 and 2133 Sixth Industrial Credit Project: $33 Million Loan Each Loans of August 31, 1982; Effective Date: November 23, 1982; Closing Date: December 31, 1987. Loans declared effective on November 28, 1982. Commitments of sub-loans progressing satisfactorily. S0.98 million disbursed as of March 31, 1983. Loan 2136 Bosnia Agricultural Development Project: $35 Million Loan of May 4, 1982; Effective Date: November 23, 1982; Closing Date: March 31, 1987 this loan became effective on November 23, 1982. Bid Evaluation Reports for all six agro-industrirl processing facilities have been cleared by the Bank. About 40% of the Contract Documents have been received while others are awaited by end April 1983. Construction of about 602 of the Popovo Polje Irrigation Project has been completed. Loan 2161 Semberija Drainage: $34.6 Million Loan of May 27, 1982; Effective Date: April 29, 1983; Closing Date: September 30, 1987. The loan is not yet effective. The new Date of Effectiveness is ret for April 29, 1983. Federal ratification and legal opinion are awaited. Loan 2233 Tuzla Water Supply and Sewerage: $30.0 hillion Loan of January 25, 1983; Effective Date: June 10, 1983; Closing Date: December 31, 1988 The Project was appraised in March/April 1982. Loan documents were signed on February 10, 1983. The loan is not yet effective. - 65 - ANNEX III SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA STRUCTURAL ADJUSTMENT LOAN SUPPLE1IENTARY DATA SHEET Section I - Timetable of Key Events (a) First Government Presentation to the Bank; December 1982 (b) Reconnaisance Mission: January 20-29, 1983 (c) Appraisal: February 28-March 18, 1983 (d) Post-appraisal: April 7-14, 1983 (e) Completion of Negotiations: May 17, 1983 (f) Planned Effectiveness: August 1983 Section II - Special Bank ImpLe-mentation Action The Bank will exchange views from time to time with the Government on the progress in implementing the structural adjustment program set forth in its Letter of Development Policy. Section III - Special Conditions A. Effectiveness Establishment of Export Development Fund and Special Account (para. 78) B. Other Release of the second tranche of $100 million of the loan would depend upon the Governmeat making satisfactory progress in carrying out commitments undertaken in its Letter of Development Policy and executing its economic program following the first exchange of views with the Bank expected to take place in October 1983 (para. 76). - 66 - ANNEX IV Page 1 of 24 hr. A. W. Clausen President The World Bank 1818 R Street, N.W. Washington, D.C. 20433 U.S.A. Dear hr. Clausen: 1. In view of the positive experience and the heretofore very successful cooperation between Yugoslavia and the World Bank, the Federal Executive Council has formulated .this Letter on Y'igoslavia's development policy till the end of 1985, directly connecteC with the talks on new forms of our long-standing cooperation i.e. relevant to the request for granting Yugoslavia the first loan for the structural adjustment of the Yugoslav economy. 2. In this letter the Federal Executive Council has articulated the directions of development and current economic policy which it will submit before the SFRY Assembly, and along the lines of which it will evolve its activity in implementing the economic stabilization policy, and inform the World Bank on the results on a regular basis. Taking account of the opinions of your mission advanced during the talks conducted with the Yugoslav authorities in Belgrade in February and April of this year that the World Bank through these forms of cooperation in no way wants to bring into question the self-management system and decision-making modes on national development and economic policy based on our constitutional order, the Federal Executive Council shall submit to the SFRY Assembly and execute the declared intent of this letter within its jurisdiction as well as take decisions in accordance with the socio-economic system established and constituted in Yugoslavia. 3. We also wish to express the view and the assurances of the Federal Executive Council that, in view of the degree of Yugoslavia's development, the prevailing external circumstances affecting the development of our country, as well as the efforts and results in the implementation of the economic stabilization policy and in dealing with certain problems in our economy, the intent of this letter is part of a more comprehensive strategy and policy of the development of our country expressed through the long-term stabilization program. The Federal Executive Council shall pursue the long-term stabilization program with determination with a view to the successful continuation of the country's social and economic development based on socialist self-management and a non-aligned foreign policy. - 67 - ANNEX IV Page 2 of 24 The Macroeconomic Situation 4. As you are aware, developments in the international economy since 1979 have placed a great strain on the Yugoslav economy. The rise in oil prices, taken together with the weak performance of Yugoslav exports in that year and in the years preceding and the burden of increased interest payments on international debt, had led to a balance-of-payments deficit of $3.7 billion in 1979. This deficit, together with other disturbances in commodity and money relations in the domestic economy, had led the Government as early as the second half of 1980 to begin to introduce and implement a program of stabilization measures which between 1981 and 1983 have become became increasingly comprehensive and better defined and are still in the course of implementation. The main characteristics of these measures, which have been supported by substantial assistance from the IMF since June 1980, are primarily related to a considerable increase of production through increased capacity utilization and strengthening of its competitive capabilities in relation to foreign countries and increase of exports, particularly to the convertible currency area. It has been necessary to act more resolutely to adapt all forms of consumption to real income and material possibilities, and to this end we opted for more restrictive monetary and fiscal policies, a more active policy of the rate of exchange of the dinar to encourage exports, curb public consumption, curb investment demand and promote investment efficiency by increasing the share of organizations of associated labour in financing investments, with a concurrent restriction on credit demand, and take other similar measures aimed at removing generators of unstable relations in reproduction. At the same time action has been taken to reduce import purchases in line with revenues accruing from export earnings and from a more restrained program of foreign borrowing than has been the case in the preceding period. 5. As a result of these measures, Yugoslavia was successful in reducing its balance-of-payments deficit substantially to $2.3 billion in 1980 and to $0.9 billion in 1981. These improvements were based upon a considerable increase in exports of goods and nonfactor services, which increased by 11 in 1980 and 12% in 1981 in real terms. Notwithstanding this export performance, achieving the balance of payments deficit mentioned above involved outright cuts in imports of 10% in 1980 and a further 2X in 1981. These changes have resulted in an increase of the coverage of imports by exports to 59.6% in 1980 and 70.2% in 1981 as compared to 48.5% in 1979. The cuts in imports were necessitated by several factors, including insufficient merchandise exports, the weak performance of exports of invisibles and the continued adverse impact of rising international interest rates. In addition, the deteriorating climate in international capital markets led to a reduction in the level and certainty with which foreign funds could be used in Yugoslavia, adding further to the need to constrain imports. - 68 - ANNEX IV Page 3 of 24 6. Although we had reason to feel encouraged by developments in the balance of payments between 1979 and 1981, these gains were at an appreciable cost to the economy as a whole and were accompanied by other, less positive developments. The growth rate of social product of 7.0% in 1979 was sharply reduced to 2.22 and 1.5%, respectively, in 1980 and 1981, with industrial output especially hard hit, its 1979 growth rate of 8.22 falling to 4.1% in 1980 and 1981. The need to step up exports and to address the country's external liquidity problems despite low economic growth involved reductions of all forms of final consumption. Particularly noteworthy were trends in real fixed investment, from growth of 6.4% in 1979 to reductions of 1.7% in 1980 and a further 9.3% in 1981 as well as reductions in real personal incomes in the social sector by 8% in 1980 and 5% in 1981. Despite significant reductions in domestic demand, inflationary pressures remained considerable and have necessitated measures of social price control in accordance with our Anti-Inflation Program. 7. Developments in 1982 did not, unfortunately, lead to any significant reversal in these trends. Despite our best efforts there was a revival in domestic demand in the first half of that year, accompanied by a worsening in inflationary pressure. At the same time exports to the convertible currency area were reduced as compared to the preceding year and there was a reduction of foreign exchange inflow from tourism as well as from workers' remittarcft :le to a number of external and internal causes. External liquidity diffic..lties of some of our banks prevented us from completing our borrowing program and maintaining our short-term debt liabilities at planned levels. The consequence of these developments was to put further pressure on our imports from the convertible area. While the balance of payments deficit with the convertible area was reduced substantially, this was almost wholly due to reductions in imports to an extent that has been harmful to the smooth running of the economy, above all industrial production. Additional measures to restrict demand were taken in 1982 leading to a further reduction in real personal incomes in the social sector of about 3%. Fixed investments were also further reduced by about 6%. Structural Aspects 8. While on the one hand trends in the external environment were important proximate causes of our current difficulties, on the other the severity of our present economic situation also reflects certain structural problems in the development of the Yugoslav economy in recent years. Of particular importance were investment policy and certain aspects of the framework for the allocation of the available resources. 9. In the area pf investment policy our fundamental objective, embodied in Yugoslavia's 1976-1980 medium-term plan, was to direct - 69 - ANNEX IV Page 4 of 24 investment into certain priority sectors whose accelerated development was seen as necessary by mutual agreement between the socialist republics and the socialist autonomous provinces, and which are of particular importance to the development of the Yugoslav economy as a whole. Our experience in the 1976-1980 medium-term plan period revealed certain weaknesses in the envisaged material and financial frameworks for implementing the investment policy agreed upon. The assumptions and frameworks of the plan were designed to give stronger expression to the principle that organizations of associated labour have a decisive role in investment proposals and in taking decisions to invest with a view to the accelerated development of the economy and society in general. However, the eagerness to attain the agreed development objectives as set in the plan and the fact that, owing to a number of external and internal factors the required domestic capital was not available, accompanied by relatively high inflation and the underpricing of capital (as reflected in negative real interest rates), led to excessive investment demand in comparison with the financing possibilities available. Consequently, the very ambitious program initiated in the 1976-1980 plan period led to too many projects being simultaneously launched throughout the country, with the inevitable consequence that investable resources were stretched too thinly over too many projects. A number of factors contributed to these difficulties; the definition of priority sectors for investment proved to be too broad and insufficiently selective; expectations regarding the growth of investors' own sources of financing did not materialize to a sufficient degree, which in turn led to increased reliance on external sources of financing, one of the causes of this being the very slow progress in the pooling of resources between enterprises; insufficient attention was paid to the financial planning of investments and in connection thereto to establishing the framework for the allocation of resources for the accelerated development of priority sectors; insufficient attention was paid to the economic evaluation and market viability of projects in the project appraisal and selection process; as stated, in view of the high rate of inflation, interest rates did not play a sufficiently important role in directing investable resources; price rises in the investment sector led to high cost overruns reflected in reduced investment efficiency and other factors caused by general economic instability. 10. These problems, and particularly the problems generated by a regime of increasingly negative interest rates were complicated by other distortions in the allocative framework. In the area of trade policy an overvalued exchange rate for the dinar, together with the protective mechanisms that became necessary to defend such a rate, insufficiently stimulated production for exports, which in turn resulted in a worsening of structural problems. At the same time, certain relative price distortions in the transportation, energy and agricultural sectors discouraged efficient investment and consumption decisions. Finally, the overall - 70 - ANNEX IV Page 5 of 24 conditions of economic activity in which economic decisions were taken by organizations of associated labour made them less responsive to market laws than was desirable, since a wide variety of mechanisms existed to absorb losses and to protect the economic agents involved from the adverse consequences of such decisions. 11. Given the consequences of this policy regime toward the end of the last plan period, and the aggravated state of external and internal conditions, the framework of Yugoslavia's 1981-1985 Social Plan aimed for a much slower growth of the economy with a reduction in the investment rate and a stress on the completion of on-going projects through allocating more resources to more narrowly defined priority activities with a view to a faster elimination of basic structural problems. However, due to the further deterioration in the world economy and in the external position of Yugoslavia, it soon became clear that even these scaled back targets were too ambitious, given the resources envisaged in the Social Plan of Yugoslavia. It also became clear that considerable changes in the functioning of mechanisms and instruments of the economic system and economic policy would be needed to undertake the faster structural adjustment of the economy, if the economy was to be put back onto a relatively fast and stable growth path. 12. In keeping with our specific political and socio-economic system, a special Commission, called the Stabilization Commission, was set up in July 1980, within the Federal Social Councils to deal with the issues of economic stabilization. The main task of this Commission was to work out a comprehensive and long-term program of economic stabilization. This program was to be the basis for the work of the appropriate competent organs in solving the most pressing issues in the fields of current economic and developmental policy. With the participation of a large number of scientistd, experts and other public workers from the whole country, the Commission has been working on eighteen studies, which concern the strategic development of the country and measures of economic policy. The work of this Commission is now nearing completion, and it is expected that a program of economic stabilization in the form of a legal act will be submitted to the Assembly of Yugoslavia in the first half of this year, to be adopted by the Assembly this year with the consent of all the assemblies of the republics and provinces. Proceeding from the results of the work of this Commission to date, and in parallel with this, as specified in more detail below, we have been undertaking a series of economic policy actions designed to address the major socio-economic issues referred to above. 13. One consequence of the deliberations of the Stabilization Commission, and of the discussion and debate of its proposals that have ensued, has been the revision of the medium-term development orientation of the country. In this connection, work is in progress on the amendments to - 71 - ANNEX IV Page 6 of 24 the Social Plan of Yugoslavia and the social plans of the republics and autonomous provinces for the 1981-1985 period. At the same time, these revisions will serve as the basis for the long-term concept of the country's development policy through 1990 and 2000. The main characteristics of the revised framework are: the faster structural adjustment of the economy aimed at a more efficient and complete inclusion of our country in the international division of labour; adjustment of domestic demand in line with realistically available resources; a greater reliance on market forces, coupled with appropriate guidance by the plan; and the adaptation of appropriate economic policy measures and instruments to achieve macroeconomic balance in the economy. At the same time, given the current unsettled conditions in international financial markets, there has been a reaffirmation of the policy of economic stabilization to restrict the growth in external indebtedness of the country, through greater reliance on domestic potential, and by facilitating increased exports and improved utilization of resources. 14. Details of our medium-term economic adjustment program are presented below. As you will see, this program is directly aimed at eliminating the weaknesses in the regime of socio-political measures identified earlier, as well as towards attaining the developmental objectives which we deem appropriate in view of the present situation in our economy. With the support provided to us by the World Bank, the IMF and other financial institutions in recent months, we feel that this is the appropriate time for intensifying activities aimed at the faster structural adjustment of our economy, as a necessary condition for implementing the program of economic stabilization and restoring the trend of relatively dynamic economic growth which would reflect more accurately the use of the available economic potential during the next medium-term period 1986-1990. The Medium-Term Adjustment Program 15. The Yugoslav program for 1983 is articulated in the Annual Plan Resolution for 1983, currently in effect. The salient features of this program are also described in a Letter of Intent addressed by Yugoslavia to the Managing Director of the IMF. This program, among other things, envisages further restrictions in all forms of domestic consumption and continued significant reductions in fixed investments, in line with the possibilities for ensuring resources from realistic sources. These restrictions, coupled with the strengthening of qualitative factors in economic activities and a- -ctive dinar exchange rate policy, should have a favourable impact on the competitiveness of the Yugoslav economy and boost export efforts. Other elements of this program include increases in interest rates and selective price increases designed to correct relative price distortions. - 72 - AFNEX IV Page 7 of 24 16. The 1981-1985 five-year Social Plan of Yugoslavia and the plans of the republics and autonomous provinces for the same period are also in the process of revision. Their revision is expected to be completed by the end of this year. The orientation of economic policy will remain, broadly speaking, unchanged. One of the main objectives of the plan is to put the balance of payments with the convertible currency area on a more secure footing through a vigorous expansion of exports while reducing the relative external indebtedness of the country. Given the scaled down material possibilities, these amendments to the plans are not expected to bring about a more dynamic economic growth and a more considerable increase in domestic consumption before the end of this planning period. More dynamic growth in the following planning period should however be possible on the basis that is established. Within this general framework the principal directions of economic policy and activities in the current plan are given below. Our intention is to conclude, by the end of June this year, an agreement on amendments to the Agreement on the Bases of the Social Plan of Yugoslavia for the 1981-1985 period and to prepare appropriate analytical materials on the developmental possibilities of the country to the end of 1985, which will serve as a basis for amendments to the Plan. The competent organs shall inform the Bank, not later than the end of September 1983, on the results of the work on amendments to the plan documents with particular emphasis on .he main development objectives and the priority sectors of the economy, submitting to the Bank plan documents which in the meantime are to be enacted. Prior to adopting the Annual Resolutions of Economic Policy for 1984 and 1985 the Bank shall be informed on the macroeconomic assumptions on which investment policy is to be based and the proposed sectoral allocation of investment for the relevant year, and the necessity for discussion on specific issues emanating from these documents will be jointly assessed. Investment Policy and Resource Allocation Ongoing Investments. 17. As already noted, there have been significant reductions in the volume of investments in the last three years, and the Annual Plan for 1983 envisages a further reduction in real fixed investments by 20X. Tnis process of bringing investments in line with real investable resources is expected to continue into 1984 and 1985 so that the volume of fixed investment over the 1981-1985 period will be about 20-25Z lower than in the original plan. In the course of implementing these cuts and in preparation for the remaining years of the medium-term plan we have been engaged in narrowing and refocussing our investments in the desired direction. We have already successfully reduced the volume of non-economic investments to a far greater extent than that of investments in economic activities, as had been our intention. Within economic activities, our orientation has - 73 - ANNEX IV Page 8 of 24 been to concentrate on completing ongoing projects, particularly those which will provide the most immediate effects as regards increased production and the improvement of the balance of payments. We have severely limited the initiation of new projects, except those which will clearly in a relatively short time have a beneficial impact on the balance on payments and solve, on a more permanent basis, the structural p-oblems in the economy. In addition to improving the balance of payments, through increased production for export and rational import substitution, we intend to accord priority to energy production and conservation and to food production. Our views of priorities will be reflected in the sectoral allocation of investment resources, to be incorporated in the revised medium-term plan. 18. While the total number of ongoing investment projects is still very large, a relatively small number of large projects account for a substantial portio of the work in progress. We have therefore paid particular attention to these large projects with a view to reducing their number and rephasing their execution in line with our financial capabilities and the above-mentioned priorities. In the context of our review of the program of ongoing investments, and related to changes in the social development plans, and in view of the importance of the energy sector in our overall adjustment strategy, we intend to complete a special review of our investment program in the energy sector by June this year, in conformity with the long-term development of the energy sector of Yugoslavia. Results of this special review will be communicated to the Bank. In accordance with our economic system, we intend to rely on indirect measures to reorient investment towards priority activities and away from those considered non-priority. In this connection, a number of measures have already been undertaken aimed at curbing investment in non-priority activities. Under the credit policy for 1983, the level of bank credits for non-priority investment projects will in nominal terms be considerably reduced in comparison with 1982. In addition, under the Law on Temporary Injunction against Issuing Guarantees and Other Instruments for Securing Resources from Future Revenues and against Granting Credits and Issuing Guarantees for Cost Overruns in the Financing of Investments, the banks are prohibited from issuing guarantees and financing cost overruns in non-priority activities. Given the inflation to date, it is expected that these restrictions will lead to a significant real decline in the share of non-priority investment in total investment. These measures will enable us to effect structural changes in the pattern of investments, not only in the large projects mentioned above, but also in medium-size and smaller projects. 19. In order to strengthen project monitoring capabilities, the Federal Social Planning Institute, the Federal Social Accounting Service and the Federal Institute of Statistics have begun work on an improved - 74 - ANNEX IV Page 9 of 24 system for recording the progress on ongoing investment projects. The first step in this process shall be the preparation of semi-annual reports on ongoing investment projects, particularly on projects exceeding 750 million dinars, starting in October 1983. Particular attention will be given to reporting on progress in projects included in the revised program of priority activities, especially those in the energy sector mentioned above. The Bank shall be informed in an agreed format about findings based upon these reports and evaluation of competent organs, and discussion on these reports shall be held as considered necessarv. In addition, we intend to move to a system of more frequent quarterly reporting during 1984 once the system of recording investments and the technical procedure become established. Information on the economic and financial rates of return on new projects the value of which exceeds 750 million dinars, shall also be communicated to the Bank starting April 1984. New Investments 20. An indispensable part of our structural adjustment effort and of the improved environment for investment decisions is to elaborate criteria _-nd parameters which would ensure a more rational selection of investment pro?cts in a way that is compatible with our self-managed system of decisicn-making. In our view such improvements should consist of improved criteria for the appraisal of investment projects and of appropriate mechanisms to implement them, the more realistic evaluation of investment costs and tle greater accountability of investing units for the outcome of these investmnent decisions. 21. A number of steps have already been taken to improve the institutional nnd legal framework for investment approval and coordination. Firstly, for all proposed investments, assured sources of financing must be secured. Secondly, the contributions of the investors are clearly specified in the Law on Special Conditions for Approving Investment Credits, and are based on a sliding scale ranging from 10-9OX, depending on the purpose of investments. Thirdly, in contrast to past practice, the banks are now prohibited from issuing guarantees against the future income of the organization of associated labour to cover its contribution to the financing of investment (except in a limited number of priority areas). It is expected that these measures will in combination serve to reduce the demand for investable resources, and by requiring investors to contribute more of their own resources to investment projects also to introduce a more cautious approach to new investments. 24. We are also in the process of implementing a program to improve project selection and appraisal prozedures in Yugoslavia, in accordance with the agreed development policy. The first step in this process was taken in November 1982 when the Social Compact on Registering Proposed - 7c - ANNEX IV Page 10 of 24 Investments was concluded, requiring investors to register proposed investment projects in the economic sectors with a value in excess of 50 or 100 million Dinars with the Regional or Federal Chambers of Economy. We intend, by June 1'78, to conclude, in Yugoslavia, a Social Compact on the Criteria for, and Evaluation of, the Socio-economic Justification of Proposed Investments wziich will be used in conjunction with the existing compacts in some republics which deal in greater detail with such matters and with criteria determined by individual banks. The draft Compact provides for a number of minimum criteria that must by met by projects throughout the country, and for the methods of institutional implementation and monitoring of these criteria. These criteria will, inter alia, include the economic rate of return (calculated according to the World Bank methodology) for investment projects in the economic sectors in conformity with the Social Compact mentioned above. This Compact would provide for a minimum economic rate of return on the investment, taking into account the criteria of the World Bank, although the minimum rate of return would vary depending on the nature of the activity. The proposed Social Compact will provide for the establishment of appropriate bodies attached to the Chambers of Economy which would give opinions regarding the social and economic justification of registered proposed investments, taking into account the agreed criteria and their implementation, in conformity with the right of working people independently and in a self-management manner to decide on investments. In line with the legal regulations, this opinion would be, within an appropriate time frame (which shall be fixed in the mentioned Compact), submitted to the management body of the BOAL concerned, which would, on its part, be obliged to inform the workers on this opinion before the final investment decision is taken, as well as for the purpose of informing all other interested OALS, communities, banks as well as the Federal, Republican and Provincial Institutes for Social Planning. 23. Complementing the conclusion of this Social Compact, it will be necessary to strengthen the capacity of personnel in the OALs, commercial banks and chambers of economy for the purpose of monitoring and implementing this Compact as well as other established and agreed criteria and to work on the promotion of the system of criteria for the evaluation of socio-economic justification of investments. Accordingly, Federal, Republican and Provincial Chambers of Economy and the commercial banks will, by December 1983 prepare personnel training and recruitment :r-ograms for improved investment efficiency review procedures, so that by December 1984, the Federal and regional Chambers of Economy and commercial banks will have sufficient trained personnel for the revised investment procedures. 24. With the financial aid of the World Bank we intend to conduct studies in important subsectors of industry and other studies with a view to improving the investment efficiency in these subsectors. These - 76 - ANNEX IV Page 11 of 24 subsector studies could form the basis of future subsector lending by the World Bank to Yugoslavia. Ine framework and modalities of these studies would be discussed with the World Bank in September 1983. Interest Rate Policy 25. During the past year, the interest rate mechanism has been actively used in support of our adjustment efforts. Since March 1982, nominal deposit interest rates have been raised on three occasions. The most recent increase occured in FeL..tary 1983, with the result that the lending rates on commercial bank credits from their own resources have risen significantly. Although new lending rates vary significantly according to the particular circumstances of each bank, lending rates for non-priority purposes, and in some instances even priority projects, are approaching or have reached real levels. However, despite these increases in nominal interest rates, owing to the continued relatively high rate of inflation in Yugoslavia, average lending rates on commercial bank resources and more especially on selective credits and special funds have remained negative in real terms. There is a firm intention of gradual attainment of real interest rates over several years through, primarily, reducing inflation rates and gradually adjusting the nominal interest rates to these trends, in conformity with the long-term orientation of the Anti-inflation Program. 26. The most recent increase in borrowing interest rates, effected in February this year, was based on our assumptions of likely annual growth in producers prices. In accordance with tie objectives of the medIum-term policy and determination to gradually adjust the interest rates to the rate of inflation, if the information shows that producers prices rise at a rate of growth faster than the 1lanned one, we shall review the need to adjust interest rates to such trends. 27. As concerns the interest rate policy in the coming years providing for the adjustment of interest rates in line with the movements in inflation, it is proposed to introduce a floor lending rate for new credits from domestic commercial bank resources. This floor interest rate would be introduced as of January 1, 1984 and would initially amount to 18%. Should inflation in 1983 (January 1 to December 31, 1983) be higher than anticipated, this initial interest rate would be increased by at least one-third of the difference between the initial floor rate (182) and the rate of inflation in 1983 (as measured by the index of producers prices). The process of adjustment of interest rates resulting in the attainment of real interest rates would be concluded in 1986. In the course of this period, real interest rates should be gradually introduced, namely: - For economic sectors, in January 1985 the floor interest rate would be increased by at least one-third of the difference - 77 - ANNEX IV Page 12 of 24 between the growth of producers prices and the floor interest rate set for 1984. However, if in 1984 the rate of growth of retail prices should exceed the growth of producers prices, the floor interest rate for 1985 vould be increased by an additional amount equal to at least one-third of the difference between the increase in the index of producers prices and the index of retail prices. The same formula would be applied for setting the floor interest rate in 1986. In January 1987 the floor interest rate would be adjusted in accordance with the index of producers prices for 1986, unless the rate of increase of retail prices in 1986 was higher than that of producers prices, in which case the floor interest rate would be at least equal to the level of the increase of retail prices in 1986. - For non-economic sectors, starting in Januse-y 1984, floor interest rates would be adjusted annually in the course of the following two years so that by January 1986 they reach the level equal to at least the rate of inflation measured by the index of retail prices for 1985. 28. In the above context, exceptions would be iiace where interest rates would also be increased in accordance with-this adjustment but not with the same intensity and time frames, because of the selective financing which is the function of the implementation of the policy of economic stabilization in accordance with the medium-term development plau of the country, namely: (a) all export credits; (b) all short-term credits for agriculture approved within the framework of the selective credit policy of the Yugoslav National Bank; (c) investment credits for primary agricultural production (cereals, milk, meat, industrial crops and conditions for significantly increasing their production, that is large irrigation and drainage works, land consolidation and bringing new land under cultivation); for other agricultural investments including agroindustry the provisions of pa-.agraph 27 shall apply; (d) investment credits for other priority activities which will be defined and identified in the Amendments to the Social Plan of Yugoslavia for the 1981 - 1985 period; (e) resources paid into the special funds for accelerated development of less developed regions at the level of the - 78 - ANNEX IV Page 13 of 24 Federation, Republics and Autonomous Provinces, as well as resources associated in the form of joint ventures in accordance with the existing system of stimulating the development of these regions. The total volume of investment credits in fixed assets approved by domestic banks under items (c), (d) and (e) will not in any given year, through 1985, exceed 25% of the revised volume of annual total investments in fixed assets in the social sector in the 1983 - 1985 period. In January 1986, more favorable interest rates on investment credits for fixed assets for these purposes can be applied to not more than 25% of the total investment credits of domestic banks for fixed assets in the social sector. The floor iaterest rate for credits under item (c) will, as of January 1984, amount to 18X augmented by one-fifth of the difference between the floor interest rate (18Z) and the inflation in 1983 mezsured by the index of producers prices. In January 1985 the floor interest rate would be increased by at least one-fifth of the difference between the growth of producers prices and the floor interest rate set for 1984. However, if in 1984 the rate of growth of retail prices should exceed the growth of producers prices, the floor interest rate for 1985 would be increased by an additional amount equal to at least one-fifth of the difference between the increase ,6n the index of producers prices and the index of retail prices. The same formula would be applied for setting the floor interest rate in 1986, 1987 and 1988. In January 1989 the floor interest rate would be adjusted in accordance with the index of producers prices for 1988, unless the rate of increase of retail prices in 1988 was higher than that of producers prices, in which case the floor interest rate would be at least equal to the level of the increase of retail prices in 1988. We intend each year gradually to adjust interest rates on credits under items (d) above in such a way as to reach the level of real interest rates over a five year period starting on January 1, 1984 with the proviso that the floor interest rate for these credits, in January 1984, will not be less than the average rate of reproductive ability of the economy of the country (i.e. the ratio between amortization and accumulation and average use of business funds). In January 1985 the floor interest rate would be increased by at least one-fourth of the difference between the growth of producers prices and the floor interest rate set for 1984. However, if in 1984 the rate of growth of retail prices should exceed the growth of producers prices, the floor interest rate for 1985 will be increased by an additional amount equal to at least one-fourth of the difference between the increase in the index of producers prices and the index of retail prices. The same formula would be applied for setting the floor interest rate in 1986, 1987 and 1988. In January 1989 the floor interest rate would be adjusted in accordance with the index of producers prices for 1988, unless the rate of increase of retail prices in 1988 was higher than that of producers prices, in which case the floor interest rate would be at least equal to the level of the increase of retail prices in 1988. - 79 - ANIUEX IV Page 14 of 24 29. The intention of the policy is to eliminate the difference between the rate of inflation and the floor interest rate within the stated period by appropriately increasing interest rates to reduce the gap between the two in each successive year. Similarly, should there be a reduction in the rate of inflation which was used as the basis for adjusting interest rates, interest rates would be revised downwards accordingly. This means in the event that the rate of increase in retail prices in any year should be lower than the floor interest rate in that year, then the floor interest rate would be revised downwards so that the floor rate of interest cannot be lower than the rate of increase in retail prices. 30. In accordance with our medium-term development policy and with the system of stimulating accelerated development of economically less developed republics and the SAP Kosovo, as well as other less developed regions, and in accordance with the policy of interest rates proposed above, an appropriate policy of differentiated interest rates would be developed for all resources channelled to these regions through development funds. The reason for this being that these are solidarity resources targeted for a more harmonious development of the country and the reduction of differences between more and less economically developed regions in Yugoslavia, Another reason is that 50% of these resources are in the form of the association of resources between those providing and those using resources, which means that they jointly bear risks, effect the transfer of experience, bring about technological and organizational improvement and jointly generate income. The policy of economic stabilization envisages an increasing share of resources associated in this manner as compared with resources provided on the basis of obligatory loans. 31. Our existing regulations enable the introduction of variable borrowing and lending rates, so that the banks may provide for the application of such interest rates in their credit agreements. Financial Planning 32. A particular problem that has been encountered in financial planning in recent years has been the treatment of inflation, particularly in the planning of the banks and of the financing of investment projects. Under the present law, commercial banks must prepare investment plans on the basis of constant prices. In this connection the plans of banks do not cover the movement of inflation, leading to unrealistic planning and often underfinancing of specific investment projects. It is our firm intention to introduce financial planning at current prices, including planning in the banks and financial planning of investment projects. To this end, the Yugoslav Bank Association in consultation with the Federal Institute for Social Planning will, not later than the end of 1983, propose an appropriate methodology to enable the banks to make their financial and - 80 - ANNEX IV Page 15 of 24 operational projections at current prices starting in 1984. Starting at the end of 1983, the Federal Institute for Social Planning with the assistance of other competent federal bodies shall each year provide the necessary medium-term assumptions to be used by all banks in preparing their financial and operational planning at current prices. 33. Improvements of the financial base and accountability of the commercial banks relates to their provision for reserves (funds of joint liability and reserve funds). Under the Credit and Banking Law of 1978 all commercial banks are required to maintain a Joint Liability Fund which can be used to write off bad debts. The Law requires that the Joint Liability Fund not be less than 3X of each bank's total investments on December 31 of the preceding year. The same Law requires that banks create a reserve fund to maintain their liquidity. This fund should amount to 32 of each bank's total investments in the preceding year. The banks are obliged to allocate to it not less than 0.3% of their total investments until the level of 3X is attained. A number of banks are currently in breach of both requirements. In this connection, appropriate steps will be taken to ensure that all banks reach these requirements over a period of several years and subsequently maintain both funds at the level prescribed by the Law. As regards the Joint Liability Fund amendments to the statutory regulations will be proposed making it obligatory for all banks to replenish this fund over a period of 6 years and maintain it thereafter at the level of 3% of their total investments. In addition, we have been Puccessful in reducing the use of short-term deposit resources for l1ing-term lending by the banks. The 1983 Annual Plan Resolution prohibits tanks to use more than 20% of their short-term reserves for long-term lending. It is felt that this is consistent with prudent financial management and measures shall be taken so as to ensure that banks maintain this practice in the future. Foreign Exchange Allocation and External Trade 34. As was noted earlier, the acceleration of export growth to the convertible currency areas is the most urgent and important priority of economic policy. The performance in this area has been disappointing over the course of 1982 and can be attributed to'several factors including continuing stagnation in the economies of our partner countries, and in world trade, shortages of imported inputs and inadequate movement in the exchange rate of the dinar. In response to the poor performance in the first half of the year, the dinar was devalued by 20% in October 1982, and continuous exchange rate adjustments (in order to ensure continued competitiveness of the Yugoslav economy) has become an accepted part of the official policy and will remain so in 1984 and 1985. - 81 - ANNEX IV Page 16 of 24 Foreign Exchange Allocation 35. The intention of the 1978 Law on Foreign Exchange Operation and Foreign Credit Relations was to make possible the flow of foreign exchange within the economy on the basis of self-management. However, in conditions characterized by a foreign exchange shortage, the operation of the inter-bank foreign exchange market became extremely limited. The implementation of a policy of realistic dinar exchange rates will in itself contribute to reversing these trends. However, it was also considered necessary to amend the provisions of the Law on Foreign Exchange Operations and Foreign Credit Relations with effect from January 1, 1983. Therefore it can be said that efforts are being exerted to ensure the stimulation of exports and greater foreign exchange mobility in conditions when there was a shortage of these resources. The competent federal authorities will monitor and-assess the operation of the existing system and submit a report to that effect to the Federal Executive Council by September 1983. The report which would be available for discussion with the World Bank and the IhF will include a program of activities to improve foreign exchange mobility by undertaking necessary measures for reactivating the domestic foreign exchange market and more liberal procedures for stimulating organizations with surplus foreign exchange to sell it to deficit organizations. External Debt Reporting 36. To assist in more rational planning of foreign exchange, importance is attached to improving the information on foreign exchange transactions. Measures have already been taken to revise the basis on which the balance of payments is calculated, from a system of statistical exchange rates to one of market exchange rates. The highest priority is now being given to the completion of the program for the computerization of external debt data, and necessary measures (including provision of staff and financial resources) will be taken to ensure that the computerized system of debt reporting and analysis is fully operational and capable of providing analytically usable information by the end of 1983. By July 1, 1983 the World Bank will agree with the National Bank of Yugoslavia on reporting formats and a timetable that will provide a suitable test of the system while providing information of use to the Bank and the Yugoslav authorities. Export Promotion 37. In October 1982 a Law was introduced which gives priority in foreign exchange allocation to exporters with signed export contracts. With the proceeds of the Structural Adjustment Loan we shall establish a permanent revolving Export Development Fund (EDF) from which potential - 82 - ANNEX IV Page 17 of 24 exporters could borrow the foreign exchange they need. In addition to the proceeds of the SAL this fund shall be increased by foreign exchange permanently purchased from the exporters that have benefited from EDF resources. We also propose to augment the fund with additional amounts in 1984 and 1985. 38. In June 1980 a new bank for export credits - The Yugoslav Bank for International Economic Cooperation (YBIEC) was established. This bank provides export credit insurance against non-commercial risks and refinancing in dinars of medium- and long-term export credits made by commercial banks to exporters of capital goods. The operations of the YBIEC have expanded rapidly. The financial resources needed by this bank to meet the demand for export credit financing up to 1985 as indicated in its medium-term plan shall be made available by the banks, the National Bank of Yugoslavia and other appropriate sources through the Annual Plan Resolution for 1984 and 1985. Regarding the general development of the institutional capability of the YBIEC, particularly with respect to market information for capital goods and engineering exports, institutional and personnel changes are already in progress. A detailed action plan will be prepared by October 1983 which will cover activities regarding the further institutional strengthening of personnel for these jobs. It is our intention to fulfill this action plan by September 1984. 39. In the past 30 years Yugoslavia has developed a solid ini:astructure for export promotion, market information, and marketing. L wever, there is a need to assess the efficiency of this infrastructure, to improve the coordination among the various institutions and various trade crganizations and to develop their capability, in particular, for the promotion of Yugoslav exports to the developing countries and the OECD area. The responsible organs will, by May 31, 1983, form a group which will evaluate Yugoslavia's infrastructure for promoting exports and marketing and formulate a program which will cover activities for improving export promotion, organization, marketing as well as the further qualification of personnel for these tasks. It is our intention to carry out this program by t'he end of 1984. 40. Yugoslavia's export incentive system is quite comprehensive. Its administration is divided among several institutions at the federal, republican and provincial levels. It needs to be rationalized so as to encourage the expansion of efficient export activities in terms of domestic costs, and to reflect the principles of uniformity and automaticity. During the last two years the Federal Community of Interest for Foreign Economic Relations, the Federal Secretariat for Foreign Trade and the Federal Secretariat for Finance have conducted a review of the various export incentives, while draft proposals have been the subject of detailed consideration among the republican and provincial comunities of interest - 83 - ANNEX IV Page 18 of 24 for foreign economic relations, chambers of economy, banks and various associations concerned. The export incentive system will be revised along the following lines: with the real e..zhange rate of the dinar becoming the main incentive for economic exports, direct subsidies granted by the republics and provinces will gradually be phased out. Fiscal incentives, such as direct and indirect tax exemptions and drawbacks will be the same for all industrial branches and related to export value added and export performance in order to encourage export specialization and exports with high net foreign exchange earnings. Proposals are currently before the Federal Assembly to grant exports duty-free access to imported inputs wherever justified by the level of net foreign exchange earnings. The revised system of export incentives will be discussed with the World Bank at the end of 1983, prior to its implementation on January 1, 1984. 41. It is our intention to build on the successful cooperation which has been established between foreign enterprises and Yugoslav work organizations by providing additional incentives for foreign investment in Yugoslavia. We are currently engaged in a review of the laws regulating foreign investment and expect modifications to this regulation before the end of the year. Import Liberalization 42. The balance of payments difficulties with which Yugoslavia has been faced for a certain period now, have made it difficult for us fully to adhere to our long-term and essentially liberal policy of protection which reflects a generally open trade regime with low tariff levels and few quantitative restrictions. While tariff levels remain generally low, goods subject to various types of quantitative restrictions account for approximately 45% of the value of total imports, of which oil imports accounted for 16% in 1982. This does not include the restrictions on imports that have been enfcrced through the foreign exchange allocation system. 43. Measures are being taken to eliminate gradually this system of quantitative restrictions, parallel with the improvement in the balance of payments situation. As already indicated, in our program in the area of foreign exchange allocation a progressively greater role will be pla,ed by the dinar exchange rate in allocating foreign exchange. In connection with this we intend to prep-re by September 1983 a program for phased implementation starting in 1984 with a view to reducing the value of goods subject to any form of quantitative restrictions (excluding oil imports) to no more than 20% of the value of total imports by the end of 1985. A study of existing Yugoslav protection measures will also be undertaken with a view to establishing whether further adjustments in the trade regime are warranted. Terms of reference for this study will be prepared by June 1983 8 84 - ANNEX IV Page 19 of 24 (in consultation with the World Bank), and the study will be completed by April 1985. Price Policy 44. As a temporary measure to control inflation, price ceilings for all commodities except those sold on farmers markets were introduced in July 31, 1982 and extended for another six months in January 1983. Until January 1983 the authority for granting prices increases has rested solely with the Federal Executive Council (FEC); thereafter, the authority for granting price increases of some products and services has been transferred to the Communities of Interest for Prices (COIPs) at the Federal, Republican and Provincial levels. 45. In January 1983, a Social Compact on Price Policy for 1983 was signed establishing procedures for gradually phasing out ceiling prices of goods and services, and in February and March 1983 the prices of some key commodities were increased, including electricity, oil products, railway transport and some food items. 46. The number of commodities subject to price ceilings is being progressively reduced in accord vith the Social Compact on Price Policy for 1983. On the other hand, long-term price policies are being prepared in the energy, ferrous and non-ferrous metallurgy, basic chemicals, agriculture, forestry and rail transport sectors. These long-term price policy measures will be established at the latest by September 1983. It is expected that the SFRY Assembly shall adopt by September 1983 the Law amending the 1980 Law on Premises of the Price System and Social Price Control. In accordance with the Anti-Inflation Program, it is our intention to attach enhanced significance to the role of world prices and market forces in price setting and in that way enable the organizations of associated labour in conditions of mutual linkage, interdependence and joint responsibility to form the prices of their goods and services. In hay 1983 the FEC freed a substantial share of industrial products from its direct price control. Consequently only a limited number of defined commodities (e.g., petroleum and petroleum derivatives) are now subject to direct federal control. The intention is to continue to increase the proportion of commodities where prices are formed independently by the organizations of associated labor and are registered with the COIPS. In the last quarter of 1983 and 1984 we will propose the basis of price policy and our intentions of increasing the independent decision-making of the BOALs regarding the formation of prices in accordance with the 1980 Law on Premises of the Price System, and we will inform the World Bank immediately thereof. Within the framework of these measures a policy aimed at eliminating the distortions in the basic branch sectors (agriculture, - 85 - ANNEX IV Page 20 of 24 energy, transport! ferrous and non-ferrous metallurgy, etc.) will be implemented. 47. In agriculture, only the purchase prices of major commodities are subject to federal regulations. These are in general above world prices and their relative prices are broadly iD line with world prices. These prices are normally set each September for the coming year and will take into account world prices and the projected dinar exchange rate over the coming year. 48. We have already formulated a comprehensive strategy for the rationalization of energy production and consumption. One of the cornerstones of this strategy is the movement of energy prices to levels that would be at parity with world prices. The prices of domestic and imported crude oil are now at parity and the prices of petroleum products are at or substantially above these prices. The intention is to maintain these prices at least at their current level in real terms by adjusting prices periodically to world market trends, the dinar exchange rate and the domestic rate of inflation. The price of these products will be reviewed at least twice a year to determine whether adjustments are required in the light of these factors. 49. As regards natural gas, the price of domestic gas is significantly below that of imported gas. The intention is to move the domestic price of gas to achieve parity with the imported price of gas by January 1987. Towards attaining this objective the first major adjustment was made in May 1983. Further annual real adjustments in domestic gas prices will be implemented in conformity with the long-term price policy in the sector of energy, and we will regularly inform the,World Bank of our progress in reaching this goal. 50. As for the pricing of lignite, coal and electricity, it is our intention to formulate a long-term policy for achieving parity with economic prices over a period of 4-5 years; however, in order to assist the author-ties in the formulation of the proposed policy, we plan to initiate by September 1983 and complete by December 31, 1983, a study by JUGEL and the hining Association to outline the appropriate pricing methodology. 51. Presently the average tariff for electricity is below the economic cost of supply, depending on conditions prevailing in the individual republics and provinces. In order to ensure that consumers use electricity efficiently, the average tariff for electricity for all consumers will be moved, over a period of 4-5 years, towards parity with economic prices. Towards attaining this objective the tariffs were increased by 25Z in March 1983. 'e intend to review the trend in producers prices during the period since March this year, and increase tariffs for electricity in January 1984 - 86 - ANNEX IV Page 21 of 24 by 15% in real terns (over the increase of producers prices during April to December 1983). Further annual real adjustments in tariffs for electricity, towards reaching the stated objective, will be implemented in subsequent years. 52. The long-term price policy in transport will provide for annual tariff increases in the railway transportation sector above annual rates of inflation so that, by the end of 1990, compensation payments to all Railway Transport OrgLnizations (RTOs) will be eliminated, with some minor exceptions. Towards attaining this objective, railway tariffs were increased by 17% in December 1982 and 16X in February 1983. We intend to increase railway tariffs in January 1984 by at least 10% in real terms (over the increase in producers prices during January to December 1983). In subsequent years starting in 1985, railway tariffs would be increased by at least 6% in real terms to ensure that compensation payments decline over the previous year. For road user charges, the long-term policy is to adjust the charges in line with inflation rates in order to provide adequate funds for road investments and maintenance. With this orientation in mind, we intend to earmark road user charges for road expenditures. In addition, at the time of the increase in liquid fuel prices the portion of these prices earmarked for road user charges will be adjusted in accordance with the price policy in force. The Council of Republican and Provincial Self-managing Communities of Interest for Roads will prepare, by September 1983, a study defining a program of road maintenance and rehabilitation requirements. Financial Discipline 53. In order to strengthen financial discipline in Organizations of Associated Labour by increasing accountability for unprofitable operation, a Law on Rehabilitation and Dissolution of Organizations of Associated Labour was passed in 1980. This Law established a timetable for closing loss-making organizations which cannot obtain resources for their rehabilitation programs. It also provides for the reduction of personal incomes of the workers in loss-making organizations, participation by banks and other entities providing support for rehabilitation programs in their design and monitoring, and for determining the causes of unprofitable operationu and responsibilities of workers, bodies of management and managers for the losses. 54. Draft amendments to this Law, currently under consideration, would further strengthen the role of banks and other organizations, 'hich participate in financing the rehabilitation procedures, in the design and monitoring of rehabilitation programs, and they also provide for the possibility of replacing and recalling managers and bodies of management. The Social Accounting Service (SDQ), which has the power to block payments - 87 - ANNEX IV Page 22 of 24 of personal incomes in excess of the levels set in rehabilitation programs, will closely monitor both the financial situation of such organizations and the execution of their rehabilitation programs. ShGuld the bodies of self-management fail to determine the causes of losses, fix responsibility for such losses, and take appropriate measures to eliminate them, including the replacement or recalling of those responsible, the draft amendments to the Law provide for intervention by bodies of socio-political communities. If is has not been possible to cover the losses by the end of the year following the year in which they were incurred, the SDK will initiate bankruptcy procedures. (These provisions do not apply to energy generation and coal production organizations.) 55. In addition, amendments to the 1975 Payments Law which have now been proposed would restrict the volume and nature of inter-enterprise credits arising from trading operations outside the banking system. Inter enterprise credit not covered by instruments of payment will be reduced by 50 billion dinars in 1983 as compared with 1982. It is expected that the amendments to the above Law as well as those to the 1980 Law on Rehabilitation and Dissolution of Organizations of Associated Labour, and a new law designed to prevent organizations from the investing and crediting for which they lack adequate working capital will be passed by June 1983. 56. By December 1983 additional measures will be prepared designed to reduce the real value of payments to cover the losses of organizations of associated labour so that these measures will limit the nominal value of financial support from common reserve funds of socio-political communities and from communities of interest to its 1983 level in both 1984 and 1985. Energy Conservation 57. The point of departure of our strategy for energy conservation, substitution, rationalization and use is our Program for Energy Conservation and Increased Use of Domestic Energy Resources. This program has been passed by the Federal Executive Council, the Chamber of Economy of Yugoslavia and the Standing Conference of Yugoslav Cities and Communes. The program defines guidelines which are to be included in social compacts and self-management agreements on energy conservation, substitution, rationalization and consumption. The republican and provincial committees for energy and industry have already initiated the application of the program to concrete activities and plans to be pursued by work organizations, especially by major energy consumers. 58. With a view to implementing this program the Federal Executive Council has taken a considerable number of measures, including laws and other regulations already in force. The republics and provinces have also developed their energy conservation programs, while organizations of - 88 - ANNEX IV Page 23 of 24 associated labour have elaborated their specific conservation programs by type of energy source and location of consumption. All these programs are already being implemented and have already had a positive impact on energy conservation and substitution. The implementation of these programs is already reflected in the reduction of the liquid fuel consumption of about 8% in comparison to 1979 and in the increased consumption of domestic coal and gas of 8% and 4% respectively. 59. With a view to accelerating the implementation of the programs for the rationalization of energy consumption, we intend to apply to the World Bank for a loan which would be used for preparing studies and elaborating projects for conservation of imported energy and its substitution by domestic energy resources. These studies would cover those organizations of associated 1Lbour which are major consumers of energy and which would be interested in such studies. The organizations would be selected in consultation with the Bank. The studies would be prepared by internationally experienced institutes which would do the job in consultation with the Yugoslav party and in accordance with the terms of reference to be completed by June 30, 1983 and initiated by September 30, 1983 at the latest. It is expected that the studies would be completed within 12 months from the date of signing the contracts. Agriculture 60. In view of the importance of agriculture in our overall economic adjustment strategy we have launched a number of initiatives to improve our agricultural policy framework. Agricultural development issues received particular attention in the context of the work of the Stabilization Commission, and we expect to introduce a number of important measures to modify our agricultural development strategy so as to reflect the revisions of the 1981-85 five-year plan. Recently a study of the agro-processing industry prepared under the Third Agricultural Credit Project was submitted to the World Bank. We expect that the results of this study will be used in preparing the revised medium-term plan for 1981-85 for agriculture and we intend to establish teams of experts to study the problem of agroindustrial capacity imbalance and prepare action programs for each branch of agroindustry. It is our intention that these programs be prepared in November 1983 so that the results of these studies could be used for the adoption and implementation under the 1984 and 1985 planning documents. In addition we are currently engaged in a joint study with the World Bank on the question of primary production in Yugoslav agriculture. The Bank participates in the financing of the study. Following the completion of this study in DecemLber 1983, we will establish additional working groups who will be responsible for preparing, by March 1984, a program for the phased implementation of the recommendations of the said study. - 89 - ANNEX IV Page 24 of 24 Conclusion 61. This Letter of DeveLopment Policy was prepared on the basis of extensive and well-documented talks with World Bank missions which visited Yugoslavia between February and April 1983, and in negotiations in Washington in May 1983. Through this letter we are requesting a loan for the structural adjustment of the economy. We can conclude with a sense of appreciation that a comprehensive and complex task has been accomplished to the satisfaction of both parties. We would appreciate it if you considered our request and lent it adequate support so as to make possible timely approval of the structural adjustment loan which would be of vital import.nce for the implementation of our program of economic stabilization. Joze Florjancic Federal Secretary for Finance hay 25, 1983 Belgrade - 90 - ANNEX V Page 1 of 11 YUGOSLAVIA - SAL Export Development Fund A. Purpose: To finance imported raw materials, intermediate goods and spare parts for industrial exporters, and imported components for exporters of turn-key industrial projects, civil works, ships and capital goods, whose exports are covered by export credit refinanced by the Yugoslav Bank for International Economic Cooperation (YBIEC) 1/. B. hanager: Udruzena Beogradska Banka (UBB) (Associated Bank of Belgrade), which is the Borrower of che World Bank loan. C. Subloan All industrial enterprises of Yugoslavia ("work Beneficiaries: organizations of associated labor"), including agro-industries, that can justify their ability to export to convertible currency areas based on evidence of export orders, contracts or distribution agreements and have impiort requirements in convertible currency for production. - indirect imports, i.e. imports of domestic suppliers of exporters, will be eligible for financing. However such indirect imports will be included in the list of imports of the sub-borrower, who will be in all cases the final exporter. - Applications of potential exporters would provide information on: i) their financial statements for the past three years, including their holdings of foreign exchange; 1/ - Raw materials and intermediate goods include unprocessed commodities and semi-finished products to be processed in industrial facilities for production. - Spare parts shall be exclusively for existing machinery and equipment, including appropriate stock of consumable parts which are subject to regular replacement. - Imported components for YBIEC customers include parts and pieces of equipment and machinery which cannot be produced domestically and have to be incorporated in turn-key industrial projects, civil works, ships and capital goods in order to fulfill export order or contract requirements. - 91 - ANNEX V Page 2 of 11 ii) past export records, if any, export plans for the next twelve months and firm export orders, export contracts or distribution agreements, which vill result in foreign exchange earnings in convertible currencies. In case of exports through a trade organization, copies of both the agreement between the exporting enterprise and the trade organization and the corresponding export orders of the trade organization would be required; iii) information on technical and managerial capabilities, past production and production capacity; iv) justification of raw material, intermediate good and spare parts (direct or indirect) import requirements, or imported component needs, and production cycle, based on past and projected operating accounts and input-output ratios. v) agreed commercial arrangemuents, and payment terms of planned exports; vi) proof of insurance against hazard incident to the acquisition, transportation and delivery of goods to be paid out of EDF's resources; and vii) exporters of turn-key projects, civil vorks, ships and capital goods applying for the financing of imported components shall be approved customers of YBIEC for refinancing of long term export credit. Eligible exporters' sub-loan applications shall be processed on a first-come, first-served basis. Import payments and import contracts made from April 1, 1983 will be retroactively eligible-to the EDF (provided the World Bank loan is approved before June 30, 1983). However, in case of resource constraints in the EDF, a system will be worked out whereby priority in obtaining EDF sub-loans will be given to those enterprises that generate a ratio of net foreign exchange earnings higher than a minimum ratio to be established. The minimum ratio will be .greed with the World Bank. D. Intermediaries - The EDF will be administered by UBB. UBB will and Procedures; establish a separate organizational unit for the - 92 - AkINEIv Page 3 of 11 adAinistration of the EDF within its International Department. The Unit will be directed by a head and will be initially composed of three sections, one for appraising sub-loan applications, one for processing sub-loan disbursements and repayments and one for reporting on the EDF activities. The section for appraising sub-loan applications shall be initially staffed vith at least five officers. A Credit Committee of five members will be established, including one representative of UBB Credit Board who will be the chairman, two from the Federal Chamber of Economy, and two from the Yugoslav Bank Association (YA). The tmeership of the Credit Committee will be reviewed after four months of operations of the EDF. If it is evidenced that the composition of the Credit Committee is hampering efficiency of the EDF operations, its composition would be modified. Sub-borrowers will apply to the EDF through their own bank authorized to perform foreign exchange transactions (basic bank or associated bank). Sub-loans will be guaranteed by the authorized bank of the sub-borrower, i.e. by its founders. Authorized bAnks vill make a preliminary analysis of the applications, undertake the evaluation work they need to issue their s-arantee and transmit applications to the Unit with their recommendations, or to YBIEC in the case of exports refinanced by YBIEC. In case both the basic bank and the associated bank of the applicant have to be involved, applications would be first processed by the basic bank, then simultaneously transmitted to the Unit (or YBIEC) and to the associated bank of the applicant. The Unit or YBIEC will review applications with respect in particular to the creditworthiness and financial standing of the applicant, justification and commercial viability of its export plans, quality of export contracts or orders, technical and managerial capability to achieve export targets, and justification of import needs and production cycle. Applications reviewed by YBIEC will be channelled by the Unit to the Credit Committee. - 93 - ANN V Page 4 of 11 - Authorized banks, YBIEC and the Unit shall review and process sub-loan applications each within a maximun period of five working days upon receipt of applications. - Sub-loans will be formally approved or rejected by the Credit Committee of the EDF, based on the recommendations of the Unit or YBIEC. The Credit Committee shall meet at least once a week. - YBA will be informed by the Unit of all sub-loan applications and sub-loan approvals on a quarterly basis. - Ihe Unit will administer sub-loan disbursements and repaYments, the World Bank loan disbursements and servicing and will be responsible for reporting to the World Bank and for arranging audit of the EDF by independent auditors (Section X). E. Approval of - A qualified applicant shall be notified of sub-loan Qualifications; approval by a comitment telex of the Unit. A sub-loan agreement shall then be signed between UBB and the sub-borrower, which will specify, among other provisions, the amount of the sub-loan denominated in U.S. dollars, a schedule of comitment fee, interest rates, Dinar deposit and repayment terms, the sale of foreign exchange to the EDF if any (Section L), the period of availability of the sub-loan and a listing of the goods authorized for fimnacing. Possible indirect imports will be included in the listing as final exporters vill be the only sub-borrowers under the EDF. A letter of guarantee will be issued by the authorized bank of the sub-borrower prior to sub-loan agreement signing. F. Sub-loan size; - Sub-loans will amount to a maximum of 30 percent of export orders, contracts or distribution agreements for one year or $2 million, or $3 million per order or contract refinanced by YBIEC, whichever is lower, except as provided in Section L or as the World Bank may agree. The amount of finaucing of imported components for exports refinanced by YBIEC included in any sub-loan shall not exceed 20 percent of the corresponding export order or contract. The aggregated amount of financing of imported components ,-or - 94 - AMNEX V Page 5 of 11 - exporters refinanced by YBIEC shall not exceed 10 percent of the resources of the EDF at any time. - The minimwnm size of sub-loans will be $25,000. - An eligible export enterprise could benefit from several sub-leans corresponding each to an export order, contract or distribution agreement. However, the net amount outstanding and disbursed from the EDF to any single enterprise shall not exceed $5 oillion at any time, except as defined in Section L or as the World Bank may agree. G. Sub-loan Terms - The maturity of sub-loans will normally reflect the and Interest production cycle and the period for receiving actual Rates: export revenues. It will not exceed six months for exports of consumer and intermediate goods, twelve months for exports of capital goods, and eighteen months for exports refinanced by YBIEC, except as provided in Section L. - The annual interest on sub-loans will be the 6 month dollar LIBOR in effect on the day of the sub-loan telex couwntment, to be paid in US Dollars, plus a spread of 2Z in US Dollars for the EDF to cover its risks of losses and a spread of 1% in Dinar for the intermediaries (0.6% for UBB and 0.4% for the authorized bank of the sub-borrower; or 0.4% for UBB, 0.2% for YBIEC and 0.4% for the authorized bank in the case of YBIEC customers). Thus, the interest rate to be paid by the sub-borrowers, will be the six month dollar LIBOR plus three points. In addition, an annual guarautee commission of about 0.4% of the sub-loan amount will be paid in Dinar to the authorized bank. In case the sub-loan interest rate established as above would be lower than the applicable World Bank rate on the day of the sub loan commitment, the spread of the EDF, normally 2 percent, shall be increased to equalize the sub loan interest rate with the World Bank applicable rate. R. Commitment A commitment fee in US dollars equal to the commitment fee Fee; or the World Bank, currently 0.75%, will be charged to sub-borrowers on the undisbursed amount of sub-loans. Once the World Bank loan is fully disbursed, the EDF shall continue to charge a commitment fee of 0.75% to prevent -95 - ANNEXV Page 6 of 11 slow disbursements of committed sub-loans and assure optimum utilization of the EDF. I. Dinar Deposit: Upon receipt of sub-loans, the sub-borrowers will make a deposit in Dinars representing the equivalent of 10 percent of the amount of the sub-loans. These deposits will be kept in a special account of the authorized banks of the sub-borrowers and will be available for the EDF operations. They will be returned to sub-borrowers upon full repayment of sub-loans. J. Loan and - The sub-borrower, having received a sub-loan commitment Sub-loan from EDF, shall request the foreign supplier to ship Disbursements; the related goods and shall request the Unit to make payment for the goods on due date. The sub-borrower will provide the Unit with copies of supporting documents such as contracts, if any, invoices expressed in convertible currencies, shipping documents, detailed list of imported goods, including indirect imports, statement describing efforts made to obtain the most faverable terms possible from the foreign supplier. For individual contracts costing less than $2 million, normal procurement procedures of the purchaser will be applied . International competitive bidding (ICB) will be required for contracts above USS2 million in accordance with the World Bankes procurement guidelines. The Unit shall check the disbursement request and related documents to determine that: 1) the goods and amounts to be imported are consistent with the related sub-loan application; 2) appropriate procurement procedures have been followed; 3) the price to be paid for the imported goods does not appear excessive; 4) the unused and available balance stated in the sub-loan commitment issued to the applicant is sufficient to cover the amount of foreign excaange to be disbursed; and 5) the supplier is eligible under the current edition of the Bank guidelines. - 96 - ANEX V Page 7 of 11 - If the above items are satisfactory, the Unit shall promptly disburse to the supplier (or its bank) in the appropriate currency. The amount of the disbursement will be den%ainated in US dollars. The prevailing interbank exchange rate on the day of any calculation or approval shall be used for all aspects of the operation of the EDF. - In order to ensure that UBB will have ready access to foreign exchange, especially during the start-up phase of the EDF, a Special Account will be established within UBB to which the Bank would make, upon request of UBB, an initial revolving deposit of up to $30 million as soon as the loan is declared effective. Thereafter, applications for reimbursement based on appropriate supporting documentation shall be furnished to the World Bank by the Unit from time to time. K. Sub-loan - Interest and other charges on sub-loans will be paid Repayments: every six months and in full at the maturity date. Sub-loans will be repaid in full at the maturity date. Repayments, interest, and other charges will be denominated in US dollars, except for the spread of 1 percent to the intermediaries and the guarantee commission which vill be denominated in Dinar. To 'ensure proper repayment of sub-loans without delay, there will be an agreement between UBB and the authorized bank of the sub-borrower, and the sub-borrower to repay sub-loan principal, interest and other charges with priority over any other allocation of foreign exchange. From the foreign exchange proceeds of their exports, beneficiaries shall; i) repay sub-loan pzincipal, interest and other charges due to the EDF in foreign exchange (denominated in US dollars); ii) sell to the EDF the agreed portion (Section L) of their foreign exchange earnings at the prevailing official exchange rate; and iii) dispose of the balance of their foreign exchange earnings in accordance with the regulations of, and self-management agreements under the system of foreign exchange allocation. - 97 - ANX V Page 8 of 11 - In case of defaults or delays in sub-loan repayments to the EDF. the Credit Cormittee would be entitled to withhold approvals of further applications from the customers of the concerned authorized bank. In addition sub-loan agreements with sub-borrowers shall provide for a penalty interest of 4 percent on late payments. L. Repayment of the World Bank Loan and ReplenishmentlIncrease of the EDF: - The World Bank loan will be repaid out of the Export Development Fund. The foreign exchange risk related to the currency pooling scheme of the World Bank shall be borne by the EDF. - It is the policy of the Federal Government and the comon interest of all Yugoslav industrial exporters and potential exporters that the volume of the proposed EDF be not only mantained but even iucreased over time. The EDF could thus become the nucleus of a foreign exchange market which would greatly facilitate imports of Yugoslav industry in the long run. To ensure proper repayment of the World Bank loan without depleting the EDF and maintain growth in the volume of the EDF over time, a mechanism, whereby beneficiaries of sub-loans will sell on a voluntary basis a suall portion of their foreign exchange earnings to the EDF, against Dinars, will be established. This mechanism will be based on a system of incentives consisting of a scaling up of sub-loan maturities, sub-loan amounts and maximum exposure to the EDF for a single enterprise, corresponding to the sale of foreign exchange to the EDF by beneficiaries for the equivalent of 5 percent, or 10 percent of the sub-loan they received, in addition to sub-loan repayment and interest 1/. The 1/ Assuming an average sub-loan maturity of 12 months, under present levels of six-month dollar Libor and World Bank interest rate, and taking into account the World Bank loan terms applicable to Yugoslavia (15 years maturity including 3 years grace) and the spread of the EDF, the sale to the EDF cf an average of 7 percent of sub-loans in foreign exchange for a minimm of seven years would be sufficient to increase the volume of the EDF by more than 5 percent a year. After seven years the EDF would generate its own growth from the difference between its interest earnings (on a larger volume of funds), including its spread, and interest and principal paid on the World Bank loan. - 98 - ANNEX V Page 9 of 11 equivalent of 10 percent of a sub-loan would represent a maximum of 5 percent of the corresponding export earnings for a given exporter, to be provided out of its foreign exchange retention rights. In the maximum case, sub-loans would amount to 50 percent (against 30 percent in the base case) of export orders, contracts or distribution agreements , allowing beneficiaries of the EDF, under average conditions of export/output and imported input/output ratios, to finance import requirements for their entire production, i.e. for export and the domestic market. - The incentives will be as follows: Sub-loan Max munm Z of export Sale of order, Foreign contract Maximum olutstanding Exchange or distri- Max. amount Max. maturity and disbursed amount by Sub- bution in $ million in months per sub-borrower Borrower agireement (1) (2) (3) (1) (2) (3) in $ million 0 30 2.0 2.0 3.0 6 12 18 5.0 5 percent of sub-loan 40 2.5 2.5 3.5 9 15 21 6.0 10 percent of sub-loan 50 3.0 3.0 4.0 12 18 24 7.0 (1) exporters of consumer goods and intermediates (2) exporters of capital goods (3) exporters under export credit refinanced by YBIEC - Mie agreed amount (5 or 10 percent of the sub-loan amount) of sale of foreign exchange to the EDF by a given sub-borrower upon sub-loan maturity will be stipulated in the sub-loan agreement between UBB and the sub-borrower. - 99 - ANNEX V Page 10 of 11 The Dinar equivalent to the acquisition of foreign extaange by the EDF will be provided out of the Dinar deposits made by the sub-borrowers (Section J), in a revolving manner,- and out of Dinar borrowings made by the EDF. In the coming two years, a mechanism will be established whereby volontary Dinar long-term deposits will be made to the EDF by sub-borrowers through their authorized banks. These long term deposits, as well as borrowings made by the EDF, could be denominated in foreign exchange since they will be used to buy foreign exchange from sub-borrowers. M. Reporting Requirements: - The first ten applications and the Unit appraisals will be communicated ex post to the Bank. Thereafter, they would be provided as the Bank may request. - The Unit shall send to the World Bank a quarterly statistical report concerning the operations of the EDF during the preceeding quarter. This report shall include the following information. a. Name, location and branch of activity of sub-borrower; b. Sub-loan amount and terms; c. Destination of planned exports and type of goods and projects; d. Sub-loan disbursements during quarter; e. Sub-loans repayments during quarter and defaults, if any; f. Sale of foreign exchange to the EDF by beneficiaries during quarter and financial position of the EDF; and g. Dinar long term deposits made to the EDF by sub-borrowers. Such quarterly reports will be provided for the first three years of operations of the EDF. Thereafter, only semi-annual reports covering items d. e. f. and g. will be provided until repayment of the World Bank loan. - UBB shall arrange for an independent audit of the transactions under the EDF once a year. As agreed in general with the World Bank, the auditor can be SDK. The audit report would be submitted to the World Bank six months after the end of the fiscal year. - 100 - ANNEX V Page 11 of 11 N. Exchange of Views: - The eligibility criteria, procedures, interest rates, spread, sub-loan terms and system of incentives of the EDF will be reviewed with the World Bank after four months and again after one year, and corrected as appropriate to ensure optimuu utilization of, and appropriate increase in the EDF. - Until full repayment of the Bank loan, any proposed change iu institutional setting, criteria, procedures, sub-loan terms and system of incentives of the EDF shall be reviewed with the World Bank prior to implementation. 14; }.7 - ltw n X S { I U a G AR I- V% 4L ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~q* *%- 1 -. T*IN&IA ~~ ~ INICI RIK~~~~~~ IM~~~~~IC2O MI MI wrw * CV SAD.e -- St..>+J I?'~~~~~~I 1 - TUAVR M TK AREiI j EU 0 S R r | 2 St G[V~~~~~~~~~~~~~~~~~~~~~~~~~~~~R C I